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Case Summary

Financial Management-II

The Loewen Group, Inc. (Abridged)

Group 2A

Arpit Chugh (2016PGP073)


Deepam Sahu (2016PGP079)
Harshit Chaudhary (2016PGP081)
Nayna Jain (2016PGP0093)
Saachika Ahuja (2016PGP107)
Venkata Subramanian R (2016PGP120)

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Contents
Case Synopsis.............................................................................................................................3
The Loewen Group-Background............................................................................................3
The Death Care Business........................................................................................................3
The growth through consolidation..........................................................................................3
Issues..........................................................................................................................................3
Fall in Sales............................................................................................................................3
Debt Crisis and Falling Stock price........................................................................................3
Litigation................................................................................................................................3
Choice before the management..................................................................................................3
Analysis......................................................................................................................................4
Recommendations......................................................................................................................4
Conclusion..................................................................................................................................4

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Case Synopsis
The Loewen Group-Background
Ray Loewen started out helping his father run the family funeral business in late 1950s. He
incorporated the company as a funeral services corporation in British Columbia in 1985. It is
currently (in 1999) the largest such company in Canada and second largest in North America,
after Service Corporation (also known as SCI). Loewen Group owns around 1,100 funeral
homes and 400 cemeteries in U.S, Canada and U.K.
The Death Care Business
The funeral services can be sold either on at-need basis or prearranged basis.
Prearranged sales give rise to cash flows in advance of rendering services. In 1999 the
industry was highly fragmented. Personal relations and reputation were critical in generating
business. The top 4 firms in the industry accounted for 11-13% of the services only. The sales
of the industry depends on the death rate for that year, which usually doesnt vary much.
The growth through consolidation
Over the last two decades, company has grown explosively by acquiring small independent
funeral homes and cemeteries in densely populated urban market and also by acquiring
several large established funeral chains. The company had CAGR of 30% over last 5 years in
sales. In sharp contrast to SCIs business model, Loewen used to take majority ownership
stake in each acquired business but retained the same managers and gave them relative
autonomy. Due to increased demand of capital, company listed its shares on various stock
exchanges over the time.

Issues
Fall in Sales
In 1998, sales for the entire industry fell due to declining death rates and problems in
cemetery business.
Debt Crisis and Falling Stock price
In March 1999, John Lacey, a turnaround specialist, was appointed as chairman of the firm.
The company spent more than $1 billion dollars in 1996-98 in acquisitions. Relatively high
percentage of financing for acquisition came through debt. The debt-equity ratio fell
considerably. S&P downgraded Loewens public bonds from B+ to B- in Feb 1999. The stock
prices fell 38% that day. There is a risk of payment default for the firm on its interest and
principal amount payments. In past 1 year, the share prices fell by 92%.At 1998, total debt
stood at whopping $2.3 billion.
Litigation
In November 1995, Mississippi court fined the company $500 million for damages in a
litigation filed by a funeral home operator. The stock prices again fell by 15% that day and
bonds were downgraded to junk status.

Choice before the management


Based on our discussion, we think that the firm has following options
File for bankruptcy under Chapter 11 of U.S. Bankruptcy code in U.S. along with
simultaneous filing of bankruptcy in Canada and restructure the company financially.

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Stop acquisitions and generate cash flows through selling of fixed assets to pay
immediate liabilities.
File for normal bankruptcy and liquidate the companys assets completely.

Analysis
In order to improve the conditions at Loewens, the management came up with many steps
like cutting management overhead, reviewing pricing policies, hiring investment bankers to
explore various other financing options like asset sales etc. Even after these measures, the
companys financial health continued to deteriorate. Under the debt agreements, if Loewen
fails to pay interest on time or violates any covenant, the creditors would have the right to
liquidate the company.
Hence, the primary focus of John Lacy must be to meet immediate liabilities due to following
reasons:
Stock price fell from $45 in 1996 to $1 in 1999.
Interest coverage fell from 2.1 in 1996 to 0.4 in 1998.
Bond rating fell from BB+ in 1996 to B- in 1999.
Net income fell from $63.9 million in 1996 to a loss of $600 million 1998.

Recommendations
We recommend that the firm should file for bankruptcy under chapter 11 of U.S. Bankruptcy
code and simultaneously file for bankruptcy in Canada. Some kind of protocol have to be
established for resolving potential conflict between the two courts. Apart from that, following
measures must be taken:
The financial reorganisation plan must be formulated by the management and put to vote
in front of creditors.
The firm can diversify into other sectors like life insurances, death care products, new
services etc. This would help to reduce dependency of the sales on the death rates.
They must start marketing their services aggressively as compared to their traditional
approach of not doing so.
They must also try to follow SCIs method of keeping less than the industry average
proportion of fixed assets.
Put all the acquisition programs on hold till the financial health is restored.
Once the financial health is restored, Loewen Group can look out for a beneficial M&A
deal with SCI so that the Loewens shareholders can get suitable rewards for their trust in
the company when it went through difficult times.

Conclusion
At the end, the sole purpose of any firm is to maximise its shareholders value. By liquidating,
the shareholders wont get a single penny as all of the amount would be used to settle
grievances with the creditors. Hence, going by the going concept, the management must
follow the aforementioned recommendations to save company from liquidation and
simultaneously increase the shareholders value. This phase should be seen as a temporary
phase and maximum effort should be done to come out of it.