Case: The Loewen Group Inc.

| Protagonist: John Lacey

Introduction:
The case deals with a death care company, The Loewen Group Inc. based in Burnaby, British
Columbia, with the protagonist, John Lacey along with the management trying to manage
debt of the company which was accumulated because of aggressive expansion policy. Its
operational strategy was to increase margin by reducing both fixed & variable costs. They
used long-term debt to finance the aggressive acquisition. It was beneficial for tax shields,
and higher returns were created. These accomplishments aroused the interest of SCI, the
company's biggest competitor interest which made substantial offers to acquire Loewen
Group in September 1996.

Overview of the Deathcare Industry:

In 1999 deathcare industry was fragmented in the US, it was providing services like a funeral,
burial, cremation, and related products. The services were availed on the at-need basis and
pre-need basis.
The industry had predictable revenues because death rate did not vary significantly, deaths
annually increasing by 0.8% since 1960, year-on-year basis. Loewen & SCI were the largest
firms operating in this segment.
Loewens Position:
In 1999, Loewen was in a very painful situation. An unprecedented loss of $599 million and a
substantial downgrading by rating agencies, along with a crash of the stock price and
upcoming repayments of debt that amounted to almost $1 billion. Loewen was on the verge
of filing for bankruptcy, which is everything but normal in the death care services industry
segment with its predictable revenues and low rates failure. The company face a serious blow
with the declining death rates.
In 1995, the company's good financial situation started to crumble, mainly due to the
combined negative effects of degrading market conditions and overly generous dividend
policy & raising interest servicing from overpriced acquisitions. The 1996-1998 acquisition
period proved to be even more unfavourable for the firm's profitability as well as leveraging
because the firm went on to buy even larger and more overpriced death care firms through the
use of increasingly expensive debt.

Financial Position:
The company's growth strategy heavily depends on the external funding is therefore destined to
fail. The decrease in acquisition expenditures during the two years is clear evidence of that
(i.e. from $619.9 million in 1996 to 546.5 in 1997 and 252.6 in 1998).
As a result, Loewen is not able to generate cash flows from operating, financing or from
investing, and its liquidity is therefore fully distorted.
Our Findings and Position:
Loewen Group is facing problems at multiple levels which includes both operational and
financial dimensions owing to its business model. Some of the remarks regarding the
financial position of Loewen group (as evaluated from the excel sheet embedded in the
appendix) is given in the table below including recommendations relating to each
observation. Of these observations, the ones marked in red are a cause of special concern, and
our recommendations are highlighted in green out of the options available.
Sr
Remarks Explanation / Recommendations
No
One time reduction in value to match Non recurring adjustment in value of newly
1 market value of assets acquired assets responsible for erosion of value
Short Term Debt needs to be paid, No Options: 1) Defer interest payments and
obvious source of funds for this in the next default, file for bankruptcy Prepare a debt
2
year restructuring plan; 2) Raise funds through sale
of non-performing Assets
There is a liquidity crunch, additionally, Cost cutting measures and Sale of non-
Operations no longer generating Cash performing assets with a change in business
3 model which streamlines operations similar to
SCI (Have assets shared across service centres
in a locality)
4 Gross Profit no longer covers interest File for Bankruptcy
5 Debt levels far higher Due to the sudden reduction in the book value
Debt's utility as a source of finance for tax of assets (Sr. No 1) the Debt as source of
6 shielding is not useful if there is no income finance for assets increased to 50%, this led to
to shield! additional cost of interest
Due to the reduction in the death rate the estimated increase in sales did not happen. Since
the business accounting methods involved registering revenue for plots of land sold as pre-
7 sales the cost of operations were not considered in past which may be the cause of operations
not generating enough cash (Sr No 3), and thus the business operated violating the
Realisation concept
The acquisition revenue multiple is 9.55X, much higher than other competitors, in 1998
8 which revels that the investment decision was not very effective and financially sound. This
led to a huge reduction in the net income and erosion of value of business (Sr No 1)

The company should also look into its accounting practices and business model to make sure
that operational efficiency is high enough to compete in the marketplace. A look at Exhibit 1
reveals that SG&A for SCI is far lower as compared to Loewen if factored regarding the
revenues.
The overall assessment is that the company will no longer be able to pay its next year interest
and debt repayment obligations. To save itself from claims that can decimate the value
generated by the company over the years it should file for bankruptcy in the US and Canada
simultaneously and seek the help of SEC and US, Department of Commerce in clarifying the
bankruptcy laws as applicable to the firm to at least protect its US assets.
Appendix: