The Loewen Group, Inc

1/22/2015

The Loewen Gr oup, Inc. ( Abr idged)

The Loewen Group, Inc. (Abridged) Would you be willing to sell your business to Loewen Loew en and receive equity from a distressed firm? so s ress cou e a empora emporary ry p ase an once e company company is out of distress the equity can generate more value. But in the current scenario Loewen has too much accrued debt, thus the feasibility of cash is low and the equity is a rare scenario even for the preferred stock holders, as the company has too much debt, in case of bankruptcy the liquidated value will be spend paying the debt and thus equity holders will incur losses and thus I would not sell my business to a distressed firm.

Why is distress costly? Is this just the capitalized value of legal bills? What are the assets of the firm that will be damaged or destroyed if the firm becomes distressed? Distress leads to huge impact on the company image and gives a immediate push down to the stock prices. Also the distress comes with a lot of legal and consulting fees which makes it further more costlier. The assets of the company come under bankruptcy clauses and might be undervalued by the government.

What is Loewen’s immediate problem? Loewens immediate problem is long accrued debt, which has led to decline in the stock rates from 25.75 to 9.44 within a year. The company has been on a spree to grow the business through acquisitions which had been funded through debts and thus the debt increased to approx. $2.3 billion by the end of 1998.In this $42 million debt was due in first 2 weeks of April and they did not have any agreement with the bank on restructuring. The company’s rating has been degraded from B+-B- and to add to the

What are Loewen’s alternatives? What would you recommend to John Lacey? . company to improve the market image 2. Generate Generate cash flows through through selling assets and and stop acquisitions 3. Stop working on pre-need model 4. File bankruptcy bankruptcy Filing bankruptcy is the best option I would suggest to Lacy as with this amount of debt and prevalent market conditions, this is

Why Loewen might be finding itself in difficulties?

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The Loewen Group, Inc. (Abridged)

1.High outstanding debt and lack of time to plan 2.Conflicting rules in filing bankruptcy due to stakes in both US and Canada 3.Difficulties in restructuring due to multiple clauses of asset and bond restructuring covenants with the lenders 4. Industry suffering due to decline in death rates

How was the Loewen Group able to grow explosively for the first half of the 1990s? What were advantages of debt financing enjoyed by the firm in this phase? grew exp os ve y y acqu r ng sma n epen en unera omes and cemeteries in densely populated urban markets. The firm kept on acquiring and increasing its capital by taking debts and running business in an era when pre need sales of funeral services were representing an increasing share of death care business. These funds were invested in either securities or insurance contract which helped them multiply the capital and helped them pay the interest on debt and maintain a stable market image. Tax shield was another advantage they had becuase of

Would lenders want to lend to a distressed firm? Financial distress can be perceived as a temporary or permanent effect to the financial health of a firm. The chance of financial distress increases when a firm has high fixed costs, illiquid assets, or revenues that are sensitive to economic downturns. Thus a lender would like to evaluate the nature of distress of the firm. Lending at high risk will enable high return, as even in case of bankruptcy, the liquidation of assets will recover the money and if the firm revives the lender will have good stakes in the firm.

Whether the economic problems that Loewen faced were commonly felt throughout the industry? The economic problems of Loewen are mainly due to the debt accrued by the company for the acquisitions done by them to grow their business. The only common factor for the economic problem is the slowdown in death rates and thus over all slump in the industry.

How did Loewen get to the position it found itself in 1999? The reasons responsible for the position in 1999 are as follows: 1.Declining death rates 2.Complex agreement with Blackstone 3.Highly accured debt due to spree of acquisitions 4.Covenants with the lenders regarding the asset and bond restructuring 5. 10% stakes in Canada and thus problem in filing bankruptcy

Why did Loewen stock trade for $40 when SCI offered $43?

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Because jury had a unfavorable verdict in Mississippi,and stock price depressed, and company had to pay a debt of $500 million,and thus has to trade dor $40.

Loewen as “financially distressed.” Is this a fair description of its problem? Financial distress is condition where a company cannot meet or has difficulty paying off its financial obligations to its creditors. The Loewen is in a major problem only because of the debt that they have. The other problems pertaining to the debt structure and filing of bankruptcy are only due to company seeking solution to get rid of the debt.

Is there evidence that Loewen’s distress is costly? Loewen has all secured debts and are protected by collaterals. Thus in case of bankruptcy all assets will be liquidated and creditors will get the cash from the business. The case in which they wont be able to pay the debt, the distress will be very costly.

How economic distress and financial distress interact? Economic distress is a situation when an economy is suffering downturn and the companies have low revenue due to the slow market conditions, if this condition is combined with a company having high debt and thus increase the interest obligation along with low sales and profit. Thus when the 2 distress interact this further impacts the financial stability of the company

How levered was Loewen? Total Debt: $2.3 Billion D/E ratio: 1.862 Debt Due in next 3 months $4.2milliom

Why did SCI want to pay a premium for Loewen?


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Loewen was one of the biggest death care companies and SCI expected that the further situation of the Loewen to improve and generate better cash flows and expected the stock price to improve which would have generated profit for SCI

How much higher are acquisition premia in the death care market with Loewen as a rival rather than without Loewen? The acquisition revenue increased from 2.02 to 2.65 in three years, which cluld have given a 31.8% boost to the premium received.

What incremental cash flows might SCI expect that could explain this premium? SCI expected that as Loewen was on acquisition spree and thus would continue generating demand and revenue in turn, which would improve the cash flows.

Would you want to buy pre-need funeral home services from a distressed firm that might not be around to either deliver the services or keep the properties in a high state of maintenance? As the company is perceived to be having low financial s tatus, thus the general perception would be that due to internal distress they might not be able to deliver the services. Thus pre need will not make me choose them due to logical decision making

How much acquisition has SCI done (and is it likely to do)? It had bought british funeral company, Great Southern for $ 200 mn also. It wanted to acquire Loewen as it was among one of the four largest firm in the death care market.

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