THE LOEWEN GROUP, INC

Submitted By - Group Q
Geet Kumar Panwar
Marina Panggeng
Nishant Ray
Prabhat Saxena
Raghav Bhatnagar
Raunak Mantri
Shivam Paliwal
Yashvardhan Kabra

Case Overview

1985 Loewen Group was found in Vancouver, Canada by Raymond Loewen.

1987 Loewen was buy first burial service home in the United State.

Dec 2, 1999 Paul Houston was named president and CEO

Currently the Loewen Group own or work more than 1,100 burial service
home and more than 400 cemeteries, utilizing roughly 13,000 individuals over the
U.S, Canada, and United Kingdom.

90% of aggregate income is from U.S operation .

While the organization's operations had developed generously, its gainfulness

and stock cost.

In 1997, there were more than 2 million passings in the United States with
22,000 burial service home are handle the administration.

This implies that the normal memorial service home took care of short of
what two funerals every week. While some memorial service home may do 1,000 or
more funerals every year, others will have less than 30 funerals yearly.

XROADS contends that high volume homes could charge half to 33% of the
going rate and still make a sensible benefit .

Rivalry:

There are 2 potential Competitors in Funeral Industry with Loewen INC Group.

Service Corporation International ( Service Corp Int'l or SCI )

Stewart Enterprises

In 1995, however, the company's good financial situation started to erode,

mainly due to the
conjoint negative effects of degrading market conditions, exceptional litigation
costs, overly generous dividend policy and raising interest servicing from

overpriced acquisitions. The 1996 to 1998 acquisition period proved to be even

more detrimental for both the firm's profitability and leveraging, as the firm
went on to buy even larger and more overpriced death care firms through the
use of increasingly expensive debt. Loewen's successfully opposition to the SCI
takeover therefore came at an unsustainable cost. In 1998, total liabilities had
become six times larger than the market value of equity. The company overreliance on short- term debt had worsened the situation to a point that a $940.3
million debt was due in 1999, accounting for roughly 82% of 1998 sales.
Additionally, covenants securing current debt were making debt restructuring as
well as renegotiating impossible.
In general, Loewen Group's failure was mainly due to an aggressive expansion
policy. The
high levels of debt required constantly growing profits and free cash flows in
order to comply with growing repayment commitments. Loewen, however, did
not succeed in optimizing deficient operational processes. When investors took
notice of that, debt as well as equity financing of acquisitions became
increasingly difficult and the growth strategy of the company collapsed in the
end.
Facing a fatal financial situation, newly appointed CEO John Lacey will probably
not be able
to refinance the company without filing for multi-jurisdictional bankruptcy in
1999. Indeed, Chapter 11 protection appears to be the only way to give the
company the time to reorganize and refinance, cut costs and sell assets. It will
allow creating a plan for reorganization while keeping business running through
post-petition creditor privilege and executory contract provisions. John Haley's
top priority will thus be to start planning for the bankruptcy filing, while
disposing of some assets to prevent breaches of covenants before the proceeding
starts.

STRATEGY OF THE GROUP: CONSOLIDATION AND PRE-NEEDS SALES

Starting in 1969, Loewen Group followed a strategy of growth that surpassed

the growth of the market for death care services by far. The market as such
naturally only offers limited growth opportunities with the number of deaths
annually increasing by 0.8% since 1960. On the other hand the industry was
and still is highly fragmented. There are many small players, who incur
comparatively high fixed cost. These can be reduced, if several businesses are
consolidated, a strategy that first was implemented by Service Corporation,
Loewen's biggest competitor (they achieved an average reduction of fixed costs
from 65% to 54% of revenues).
The area of pre-need sales has been another growth opportunity in the past,
as people increasingly acquired death care services before their actual death
(the shares in funeral and cemetery revenues grew from 22% to 41% and from

61% to 75% respectively between 1995 and 1998). Generating cash flows
before rendering the service was a beneficial side effect of this business model.
Moreover, the market of death care services offers a high degree of stability.
Revenues are very predictable due to constant death rates as well as a lack of
price competition and market shares are easy to keep because there are high
barriers of entry (tradition and reputation play a big role).
In general, Loewen Group operated in a not overly competitive market,
which offered, however, only limited potential for growth. Their expansion was
mainly based on acquisitions of smaller competitors, a strategy that implied high
needs of capital. Loewen therefore started raising capital by issuing high
amounts of debt and also equity. The funds from operations were not enough to
finance the acquisitions (internal funding would have only enabled a fraction of
the actual growth).
Interestingly, in the operational sector, Loewen's growth strategy differed
substantially from its largest competitor: The former business owners were
usually employed as managers and retained a high degree of autonomy.
Financing was provided for capital improvements while aggressive sales tactics
were avoided. In addition, former owners usually retained a minority stake in
their old businesses and/or received Loewen stock as part of the purchase price.

PROs of Debt Financing

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
Taxes paid
Tax Rate
Interest expense
Tax shield

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

11.0

18.5

27.6

32.7

43.5

60.9 -116.8

100.1

52.5

756.4

15.6

19.7

29.1

2.7

-164.5

43.6% 40.5% 40.2% 37.3% 35.9% 32.3% 40.4% 29.1%

5.1%

-21.7%

127.5

182.3

6.6

-39.6

4.8
8.2
3.6

7.5

11.1

12.2

-47.2

12.4

17.1

19.8

21.7

34.2

53.6

91

5.0

6.9

7.4

7.8

11.1

21.7

26.5

Tax benefits: 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.

Less 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.

Four
1.
2.
3.
4.

RECOMMENDATIONS

possibilities of obtaining funds emerge:

Issuance of new capital, debt or equity
Sale of assets to reimburse debt holders at least partially
Finding an investor to buy the company
Filing for bankruptcy

Raising 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.

Asset Sales
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.

BANKRUPTCY
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.