Aurora (ARR ) fund manager Gary Channon and Direct Line founder Peter Wood have agreed to pay 550p per share to take Dignity (DTY) private, with a view to restructuring and relisting the funeral services company for as much as £70 a share.

Phoenix Asset Management Partners, of which Channon (above) is chief executive officer, already holds a 30% stake in Dignity through its London-listed company Castelnau (CGL ), a £149m portfolio of special situations that includes model toy maker Hornby and stamp dealer Stanley Gibbons which listed in October 2021.

Castelnau is, in turn, the third largest holding in Channon’s UK equity investment trust Aurora, accounting for 9.9% of its £181m assets at the end of January.

Through Castelnau, Channon teamed up with SPWOne, Wood’s private investment vehicle, to create Valderrama and spearhead the buy-out of Dignity. The consortium made its original bid in October of 475p per share, increasing it to 525p at the start of the year.

The board of Dignity and the consortium have now agreed to recommend a cash offer of 550p per share which values the company at £281m and will allow the investors to take the company private and start its transformation.

The money will be raised through Castelnau and Valderrama, with professional but not retail investors invited to join the raise via the former. Channon said as Phoenix already owns 30% of Dignity, the consortium needs to raise the remainder. Channon said Phoenix has already agreed to buy more Castelnau shares and Wood has already put in £100m of his own money to back the bid. Aurora can also participate in the raise, although Channon did not confirm whether it would.

Channon believes the ‘stock market has put a very low value on Dignity’ and the 550p offer represents a ‘fair premium’ to where the shares were trading at around 350p-375p when the first offer was made, and a fair offer for shareholders who want to take the cash.

Dignity shareholders who want to remain invested will be able to roll into a listed share of Castelnau or an ‘unlisted share alternatives’ in Valderrama.

‘Those who believe there is an upside value story will stay with us,’ said Channon.

Channon is a firm believer that there is significant upside hidden in Dignity shares. At the 2021 Dignity AGM he set out a ‘range of valuations’ for what Dignity could be worth ‘and the lowest is £19.00’ moving up to ‘as much as £70.00’.  Channon noted that a steep rise in the value of Dignity could push Castelnau to become the top holding in £170m Aurora trust.

The scope for such lofty returns means ‘paying an extra 25p’ per share versus the last bid of 525p is ‘well worth it’, said Channon.

One way to realise this gain is to re-list Dignity on the stock market and allow those who have put up capital to enjoy a ‘crystallisation event’.

‘We will likely hold on to our majority position in Castelanu and own it forever but we need external proof that we have created value,’ he said.

Channon said taking Dignity private will create ‘an acceleration of the existing strategy’ and is targeting a turnaround in 2025.

Game changer

Channon knows the business well having stood in temporarily as chief executive. While at the helm he uncovered some unsavoury practices in the sale of funeral plans, which he said the previous board refused to stop.

He resigned in 2021 and called an extraordinary general meeting (EGM), which resulted in the ousting of chairman Clive Whiley, and the resignations of the rest of the board. New chief executive Kate Davidson was appointed last year.

Channon said the ‘world of funeral plans had changed’ thanks in part to the industry becoming regulated by the Financial Conduct Authority (FCA) after a Competition and Markets Authority investigation in 2020 uncovered poor practices and high fees at Dignity.

The fund manager admitted the funeral plan industry was a ‘backwater, full of dubious operators’ but said Dignity was already changing and it now has ‘a best-in-class product set up for the new world’.

The potential to sell funeral care plans is huge given just 7% of over-50s in the UK have one, which Channon said is ‘really low on an international level’.

Increasing awareness around funeral plans is where Wood steps in, with Channon noting his expertise in ‘changing the way people view consumer products’, having found success with both Direct Line and Esure.

The plan is to ‘elevate the name of Dignity’, which is the UK’s ‘biggest end-of-life operator’, and build the brand which ‘will be better done away from the public domain’.

Channon has worked with Wood for a decade, with the former being a Hornby shareholder as well as an investor in Phoenix, then becoming the biggest investor in Castelnau having put £25m of his own cash into it.

Channon said Wood had wanted to work together on a joint venture and ‘approached me last October’ about Dignity after Wood’s team had undertaken significant research.

He described Wood’s involvement in Dignity as a ‘game changer’

Future of funerals

Channon said Dignity’s old model of hiking prices and selling plans over the phone that created a high cancellation rate was ‘a hiding to nothing that would come unstuck’.

He acknowledged there was ‘scepticism around the probability of success’ in transforming Dignity but said FCA oversight was a benefit to the private company’s renewal. 

‘I spend my life in FCA regulation. Regulation can be a burden but in this case it helps,’ he said.

‘The FCA and Dignity want the same thing…it is a threat and an opportunity but if Dignity can embrace it, it will be an advantage.’

With his focus firmly on Dignity, Channon is not yet ready to take on another special situation in Castelnau.

‘Castelnau is a machine that creates great companies and take capital  from them,’ he said.

‘We have got the bandwidth [to invest in another turnaround company] but not for some time.’