THE LOEWEN GROUP,

INC.

Case Summary
The second biggest player in the divided yet exceedingly alluring US
demise consideration market, Loewen Group became violently through
the 1980's and 1990's by obtaining numerous little administrators
furthermore assuming control more settled chains in the later years. In
1999, the traded on an open market Loewen Group possessed more than
1,100 memorial service homes and more than 400 cemeteries in the US
and Canada, with minor resources in the United Kingdom.
In light of combination, its operational method was to expand its edge
by decreasing both altered and variable expenses. Supervisors of the
gained administrators were kept to hold their associations with nearby
groups. A budgetary procedure depending on influence was likewise
incremental for Loewen's quick development. It gave the obliged
cashflow to development while gainful duty shields and higher returns
were made. Such achievements moved the enthusiasm of SCI, the
organization's greatest rival that made a generous offer to obtain Loewen
Group in September 1996. To counter the assault, Ray Loewen - the CEO
around then and beneficiary of the organization originator - quickened its
obtaining program with a specific end goal to build firm esteem enough
to forestall further endeavours of SCI.
In 1995, nonetheless, the organization's great budgetary
circumstance began to disintegrate, mostly because of the conjoint
negative impacts of corrupting economic situations, extraordinary case
costs, excessively liberal profit arrangement and raising enthusiasm
adjusting from overpriced acquisitions. The 1996 to 1998 obtaining
period turned out to be considerably more negative for both the
company's benefit and utilizing, as the firm went ahead to purchase
much bigger and more overpriced passing care firms through the
utilization of progressively lavish obligation. Loewen's effectively
restriction to the SCI takeover consequently had a go at an unsustainable
expense. In 1998, aggregate liabilities had turned into six times bigger
than the business sector estimation of value. The organization overdependence on short- term obligation had intensified the circumstances
to a point that a $940.3 million obligation was expected in 1999,
representing approximately 82% of 1998 deals. Moreover, contracts
securing current obligation were making obligation rebuilding and
additionally renegotiating unthinkable.
By and large, Loewen Group's disappointment was primarily because

of a forceful development arrangement. The abnormal amounts of

obligation obliged continually developing benefits and free trade streams
in for spendable dough request to consent to developing reimbursement
duties. Loewen, on the other hand, did not succeed in enhancing lacking
operational techniques. At the point when financial specialists considered
that, obligation and value financing of acquisitions got to be
progressively troublesome and the development methodology of the
organization caved in at last.
Confronting a deadly budgetary circumstance, recently selected CEO John
Lacey will most likely not be capable to refinance the organization
without documenting for multi-jurisdictional liquidation in 1999. Surely,
Chapter 11 assurance seems, by all accounts, to be the best way to give
the organization the time to rearrange and refinance, cut expenses and
offer resources. It will permit making an arrangement for revamping while
keeping business going through post-appeal bank benefit and executory
contract procurements. John Haley's top need will in this manner be to
begin getting ready for the liquidation recording, while discarding a few
advantages for forestall ruptures of contracts before the progressing
begins.
Growth strategy of the group: Consolidation and Pre-Needs Sales
Loewen Group emulated a procedure of development that surpassed the
development of the business for death consideration benefits by a wide
margin. The business sector all things considered regularly just offers
constrained development opportunities with the quantity of passings
every year expanding by 0.8% since 1960. Then again the business was
and still is exceedingly divided. There are numerous little players, who
bring about relatively high altered expense. These can be diminished, if a
few organizations are solidified, a procedure that first was executed by
Service Corporation, Loewen s greatest rival (they accomplished a
normal decrease of altered expenses from 65% to 54% of incomes).
The territory of preneed deals has been an alternate development
opportunity before, as individuals progressively procured demise
consideration benefits before their genuine passing (the shares in burial
service and cemetery incomes developed from 22% to 41% and from
61% to 75% individually somewhere around 1995 and 1998). Creating
money streams before rendering the administration was a valuable
reaction of this plan of action. Also, the business of death consideration
administrations offers a high level of dependability. Incomes are
extremely unsurprising because of steady demise rates and an absence

of value rivalry and pieces of the pie are not difficult to keep on the
grounds that there are high obstructions of section (custom and notoriety
assume an enormous part).
As a rule, Loewen Group worked in a not excessively aggressive
business sector, which offered, on the other hand, just restricted
potential for development. Their development was chiefly in view of
acquisitions of littler contenders, a procedure that suggested high needs
of capital. Loewen consequently began raising capital by issuing high
measures of obligation furthermore value. The stores from operations
were insufficient to fund the acquisitions (inside subsidizing would have
just empowered a small amount of the genuine development).
Interestingly, in the operational segment, Loewen s development
technique contrasted generously from its biggest rival: The previous
entrepreneurs were normally utilized as directors and held a high level of
self-sufficiency. Financing was accommodated capital changes while
forceful deals strategies were evaded. What's more, previous managers
generally held a minority stake in their old organizations and/or got
Loewen stock as a feature of the price.
Debt Financing: Advantages Associated With It
In the context of their growth strategy Loewen Group issued large
amounts of debt, including both bank loans and publicly traded bonds.
The major advantages of debt financing
enjoyed by Loewen are the
following:

Pretax income

1989

1990
1998

1991

1992

1993

1994

1995

1996

1997

11.0

18.5

27.6

32.7

43.5

60.9

-116.8

100.1

52.5

4.8

7.5

11.1

12.2

15.6

19.7

-47.2

29.1

2.7

29.1%

5.1%

-21.7%

127.5

182.3

756.4
Taxes paid
-164.5
Tax Rate

43.6%

40.5%

40.2%

37.3%

35.9%

32.3%

40.4%

Interest expense

8.2

12.4

17.1

19.8

21.7

34.2

53.6

91

Tax shield
39.6

3.6

5.0

6.9

7.4

7.8

11.1

21.7

26.5

6.6

Tax shields: Loewen incurred high tax shields as the level of debt was
constantly growing. The tax rate, however, was decreased by trend as

net income was decreasing. Particularly during the last years, the full
potential of the tax shields could therefore not be taken advantage of
Provision of required capital: Debt funding only enabled Loewen
to make their numerous acquisitions and therefore gain a superior
market share compared to all competitors but SCI. The position in the
market also entitled them to potential operational benefits that might
have not been exploited in their entirety
Low risk: The secure market environment of Loewen Group (see
section a) as well as their financial health until the 1990's probably
enabled them to incur low interest rates. Debt financing was therefore a
very cheap way of financing.
Signalling: Debt financing in contrast to other sources of finance
usually signals strength to the capital market. As a consequence their
share price might have benefited from the policy of debt financing,
which is confirmed by the constant increase until 1996.

Recommendations
Four possibilities of obtaining funds emerge:
1. Issuance of new capital
2. Sale of assets to reimburse debt holders at least partially
3. Finding an investor to buy the company
4. Filing for bankruptcy

Issuance Of New Capital

Generally, two kinds of capital can be issued. Raising sufficient

funds with new debt is practically impossible due to the reasons
named above: limited options to pledge new assets, numerous
existing covenants, junk rating by S&P, a recent fall of 30% in
bond prices and an inadequate ability to generate profits and
free cash flows. Public investors as well as banks will not be
willing to accept these risks at acceptable conditions for Loewen.
They would have to accept the old debt holders to be senior to
them while old debt holders would have to be convinced to
permit the issuance. Present failure to negotiate a debt
restructuring with the banks makes that seem highly improbable.
On the other hand, issuing equity is equally difficult.

Financial ratios, missing trust by investors, debt covenants and

the recent deterioration of the stock price will not allow
generating sufficient funds by a seasoned equity offering. Even
diluting present equity holders by 90% with a 666 million of
shares issuance would generate less than $1.285 billion.
Moreover, the old shareholders who have just witnessed the price
drop from over $40 to $1.93 are likely to be reluctant to invest
further cash in Loewen.
Sale Of Assets
Raising large amounts of cash through asset sales will be
extremely difficult, too. The numerous covenants concluded to
secure existing bank debt and securities substantially limit the
number of assets - cemetery and funeral homes - that could be
sold, as the most valuable ones are already pledged and the
company would not be free to sell them.
Moreover, the complexity of the acquisition agreements would
probably not allow for a quick sell. The recent license
suspensions for accounting violations in Florida as well as the
major write-down of big parts of Loewen's assets will also send
bad signals to potential buyers. Thorough pre-acquisition due
diligences will be the least to be expected, which would make
things even more complicated given the time pressure Loewen
Group faces. Furthermore, ongoing anti-trust investigations by
both federal and state authorities against SCI could eliminate a
potentially important buyer. A last problem to mention is the
knowledge of prospective purchasers about Loewen's problems.
They are therefore likely to take advantage of the situation and to
use their bargaining power.

Selling The Company

Similarly, rapid sale of the whole company seems unlikely. The Federal
Trade Committee or the US Department of Justice might not allow selling
Loewen to SCI, whose share exchange offer at 45$ per share was refused
two years ago. Apart from these problems, SCI's willingness to buy
Loewen is very questionable given the high level of debt and the
operational problems of the target. Other players in the market are
probably too small to provide the funds necessary to buy and restructure
Loewen Group. In addition, debt-holders' covenants would include a clause
specifying that a change of control is considered to be an event of default,
resulting in immediate termination of the loan.

Filing For Bankruptcy

Therefore, placing the firm under Chapter 11 protection, before the

firm goes totally bankrupt and reaches insolvency should be John Lacey's
first priority. As Loewen Group also has operations and assets in Canada

and in the UK, it should try to file for bankruptcy simultaneously in each
country, to prevent its creditors from ceasing UK and US assets in
response of the firm filing for bankruptcy in the US. Because of potential
jurisdictional conflicts and different bankruptcy laws, John Lacey must ask
qualified legal counsels to guide the firm through legal planning and
proceedings.