The Propel Funeral Partners Ltd (ASX: PFP) share price is up more than 5% after the funeral business announced management news.
Why is the Propel share price rising?
Propel revealed that after some negotiations, initiated and led by its independent directors, it has entered into an agreement to internalise the management of the business.
It involves the termination of the existing management agreement and a payment of $15 million to the manager. That will be $7.5 million of new shares as well as $7.5 million of cash (paid by debt).
The Propel executives Albin Kurti, Fraser Henderson and Lilli Gladstone will become employees of the group.
There will also be the transfer of intellectual property from the manager, its officers and employees to the company.
As part of the agreement, there will also be an amendment to the voluntary escrow arrangements which are currently held by an associated entity of the manager. Half of the 14.7 million shares will be released after the FY22 result, with the other half released after the FY25 result.
Why is this a good idea?
Propel outlined several advantages of this.
It will enhance and provide corporate governance advantages.
This will align with more standard management structures for ASX-listed operating entities.
It removes the obligation on the company to pay fees while the management agreement remains in place, including uncapped potential performance fees.
Propel will have a greater potential to attract new investors to the company that previously may have been unable or unwilling to invest in an externally managed company.
Finally, it will increase the shareholding of management from 20.8% to 22.6%, further aligning their interests with the company.
Summary thoughts on Propel and the share price
Whilst this will increase the company’s debt level, I think the benefits more than make up for the cost. It’s much better that management are becoming more aligned and involved with the business.
There are some long-term tailwinds when it comes to Propel, but it’s hard to say what the revenue per funeral and margins will do in the coming years. Rising interest rates could also complicate things.