Deal in Focus: Montagu acquires August's FSP

Montagu's acquisition of Funeral Services Partnership (FSP) is certainly not the first time a funeral business has been the subject of a pass-the-parcel deal among private equity investors. The resiliency and fragmented nature of the sector has typically made it an attractive target for firms specialising in market consolidation.

In a particularly extreme example, Pamplona's €900m acquisition of OGF from Astorg Partners in 2013 marked the fourth time the business had been under private equity ownership. And when FSP itself acquired 47 Laurel Funeral branches in June 2015 it marked an exit for Duke Street Capital, which had also originally made its acquisition via a tertiary buyout.

The funeral sector in the UK is still incredibly fragmented. Even today, 60% of the market is owned by smaller, owner-managed groups" – Philip Rattle, August Equity

With these types of deals so obviously prominent in the sector, it might reasonably be asked how much room for growth there still remains for institutional investors. However, according to August managing partner Philip Rattle, the sheer volume of family-owned companies suggests there is plenty of value yet to be created. "The funeral sector in the UK is still incredibly fragmented," he says. "Even today, 60% of the market is owned by smaller, owner-managed groups. There's still a huge market to be consolidated."

August initially acquired FSP for an undisclosed sum in September 2009 from a consortium of owners including Maven Capital Partners (at the time part of Aberdeen Asset Management) and Octopus Investment. The GP invested £23m to fund the group's growth strategy, eventually resulting in the bolt-on of some 107 branches – a strategy Montagu intends to continue employing. But in addition to this acquisitive approach, August also sought to improve efficiency by centralising key operational activities, while allowing the group's individual branches to maintain their local brands, teams and thus identities.

Rattle says the benefits of such a strategy are numerous, including improved and more cost-effective approaches to procurement, HR and various other operations. Additionally, FSP invested heavily in modernising many local funeral parlours – which typically change little as they pass from generation to generation – with a focus on improving the experience for bereaved customers.

Responding to a terrible discovery
Yet, August's tenure of FSP was not without its challenges. In particular, the group found itself at the centre of controversy after an undercover reporter from broadcaster ITV exposed alarming practices in one of its companies. The documentary showed members of south-London-based Gillman Funeral Services making offensive remarks about the deceased under their care. It also revealed some members of staff had intentionally ignored the instructions of bereaved families.

Rattle describes the incident as "terrible" and says the GP went to great lengths to ensure nothing similar could happen again within the company. "We had to respond vigorously. We undertook a complete review of quality, compliance and the operational way the business was growing," he says. "We invested significantly in controls to help with recruitment, making sure that we were employing the right people, that they were trained properly and that we were reviewing it regularly. We set up a separate quality and governance committee, which reviewed all the branches and produced results that the board in turn would review."

Despite the controversy, Rattle explains there was great interest in FSP from a variety of different types of financial buyers. However, August selected Montagu as its prefered bidder based on the acquirer's past experience with Dignity Funeral Services, which it bought in 2002 and exited via a £394m IPO two years later. The vendor had also considered exiting FSP via the public market, he says: "Around six or nine months ago that was probably our first plan. For a whole host of reasons we didn't pursue that, including the enthusiasm with which Montagu approached the deal, which was compelling."

With family-owned companies still dominating the market, it appears the funeral services sector remains very firmly on GPs' radars.

People
Montagu Equity – Alex Dabbous (director).
August Equity – Philip Rattle (partner).
Funeral Services Partnership – Phillip Greenfield (CEO).

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