1/22/2015

TheLoewenGroup,Inc.(Abridged)

The
Loewen Group, Inc. (Abridged)
Thedecisiontosellabusinesstoadistressedfirmlargely

dependsonthecash:equityratioinwhichIwillreceivethe
paymentandthecurrentbusinessgrowth.Inascenariowherethe
businessisnorperformingandwegettoreceivemorethan40%
Would
you be willing to sell your business to Loewen and receive equity from a distressed
ofthevalueascashandremainingasequity,Iwillpreferselling
firm?
todistressedfirmconsideringthelowproductivityofthebusiness.
Alsodistresscouldbeatemporaryphaseandoncethecompany
isoutofdistresstheequitycangeneratemorevalue.
ButinthecurrentscenarioLoewenhastoomuchaccrueddebt,
thusthefeasibilityofcashislowandtheequityisararescenario
evenforthepreferredstockholders,asthecompanyhastoo
muchdebt,incaseofbankruptcytheliquidatedvaluewillbe
spendpayingthedebtandthusequityholderswillincurlosses
andthusIwouldnotsellmybusinesstoadistressedfirm.

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?
Distressleadstohugeimpactonthecompanyimageandgivesa
immediatepushdowntothestockprices.Alsothedistresscomes
withalotoflegalandconsultingfeeswhichmakesitfurthermore
costlier.
Theassetsofthecompanycomeunderbankruptcyclausesand
mightbeundervaluedbythegovernment.

What is Loewens immediate problem?

Loewensimmediateproblemislongaccrueddebt,whichhasled
todeclineinthestockratesfrom25.75to9.44withinayear.The
companyhasbeenonaspreetogrowthebusinessthrough
acquisitionswhichhadbeenfundedthroughdebtsandthusthe
debtincreasedtoapprox.$2.3billionbytheendof1998.Inthis
$42milliondebtwasdueinfirst2weeksofAprilandtheydidnot
haveanyagreementwiththebankonrestructuring.The
companysratinghasbeendegradedfromB+Bandtoaddtothe
currentfinancialcrunchthenumberofdeathsinUShasbeen
reducingovertheyearsandthusreducingthenetincome.With
thecurrentdebtstructurethecompanyhastoberestructureand
Theorganisationcangoforthefollowingoptions:
What
are Loewens alternatives? What would you recommend to John Lacey?
goforassetsellingtopaythedebtsandpendingpayments.
1. Goforrestructuringandworkonthedebt/equityratioofthe
companytoimprovethemarketimage
2. Generatecashflowsthroughsellingassetsandstop
acquisitions
3. Stopworkingonpreneedmodel
4. Filebankruptcy
FilingbankruptcyisthebestoptionIwouldsuggesttoLacyas
withthisamountofdebtandprevalentmarketconditions,thisis
themostfeasibleoption.Thecompanydoesn'thavemuchtime

Why Loewen might be finding itself in difficulties?

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TheLoewenGroup,Inc.(Abridged)

1.Highoutstandingdebtandlackoftimetoplan
2.ConflictingrulesinfilingbankruptcyduetostakesinbothUSand
Canada
3.Difficultiesinrestructuringduetomultipleclausesofassetand
bondrestructuringcovenantswiththelenders
4.Industrysufferingduetodeclineindeathrates

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?
Itgrewexplosivelybyacquiringsmallindependentfuneralhomes
andcemeteriesindenselypopulatedurbanmarkets.
Thefirmkeptonacquiringandincreasingitscapitalbytaking
debtsandrunningbusinessinanerawhenpreneedsalesof
funeralserviceswererepresentinganincreasingshareofdeath
carebusiness.Thesefundswereinvestedineithersecuritiesor
insurancecontractwhichhelpedthemmultiplythecapitaland
helpedthempaytheinterestondebtandmaintainastablemarket
image.Taxshieldwasanotheradvantagetheyhadbecuaseof
debtfinancing

Would lenders want to lend to a distressed firm?

Financialdistresscanbeperceivedasatemporaryorpermanent
effecttothefinancialhealthofafirm.Thechanceoffinancial
distressincreaseswhenafirmhashighfixedcosts,illiquidassets,
orrevenuesthataresensitivetoeconomicdownturns.Thusalender
wouldliketoevaluatethenatureofdistressofthefirm.Lendingat
highriskwillenablehighreturn,asevenincaseofbankruptcy,the
liquidationofassetswillrecoverthemoneyandifthefirmrevives
thelenderwillhavegoodstakesinthefirm.

Whether the economic problems that Loewen faced were commonly felt throughout the
industry?
TheeconomicproblemsofLoewenaremainlyduetothedebt
accruedbythecompanyfortheacquisitionsdonebythemtogrow
theirbusiness.Theonlycommonfactorfortheeconomicproblemis
theslowdownindeathratesandthusoverallslumpintheindustry.

How did Loewen get to the position it found itself in 1999?

Thereasonsresponsibleforthepositionin1999areasfollows:
1.Decliningdeathrates
2.ComplexagreementwithBlackstone
3.Highlyaccureddebtduetospreeofacquisitions
4.Covenantswiththelendersregardingtheassetandbond
restructuring
5.10%stakesinCanadaandthusprobleminfilingbankruptcy

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

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TheLoewenGroup,Inc.(Abridged)

BecausejuryhadaunfavorableverdictinMississippi,andstock
pricedepressed,andcompanyhadtopayadebtof$500million,and
thushastotradedor$40.

Loewen as financially distressed. Is this a fair description of its problem?

Financialdistressisconditionwhereacompanycannotmeetorhas
difficultypayingoffitsfinancialobligationstoitscreditors.The
Loewenisinamajorproblemonlybecauseofthedebtthatthey
have.Theotherproblemspertainingtothedebtstructureandfilingof
bankruptcyareonlyduetocompanyseekingsolutiontogetridofthe
debt.

Is there evidence that Loewens distress is costly?

Loewenhasallsecureddebtsandareprotectedbycollaterals.Thus
incaseofbankruptcyallassetswillbeliquidatedandcreditorswill
getthecashfromthebusiness.Thecaseinwhichtheywontbeable
topaythedebt,thedistresswillbeverycostly.

How economic distress and financial distress interact?

Economicdistressisasituationwhenaneconomyissuffering
downturnandthecompanieshavelowrevenueduetotheslow
marketconditions,ifthisconditioniscombinedwithacompany
havinghighdebtandthusincreasetheinterestobligationalongwith
lowsalesandprofit.Thuswhenthe2distressinteractthisfurther
impactsthefinancialstabilityofthecompany

How levered was Loewen?

TotalDebt:$2.3Billion
D/Eratio:1.862
DebtDueinnext3months$4.2milliom

Why did SCI want to pay a premium for Loewen?

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TheLoewenGroup,Inc.(Abridged)

LoewenwasoneofthebiggestdeathcarecompaniesandSCI
expectedthatthefurthersituationoftheLoewentoimproveand
generatebettercashflowsandexpectedthestockpricetoimprove
whichwouldhavegeneratedprofitforSCI

How much higher are acquisition premia in the death care market with Loewen as a rival
rather than without Loewen?
Theacquisitionrevenueincreasedfrom2.02to2.65inthreeyears,
whichcluldhavegivena31.8%boosttothepremiumreceived.

What incremental cash flows might SCI expect that could explain this premium?
SCIexpectedthatasLoewenwasonacquisitionspreeandthus
wouldcontinuegeneratingdemandandrevenueinturn,whichwould
improvethecashflows.

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?
Asthecompanyisperceivedtobehavinglowfinancialstatus,thus
thegeneralperceptionwouldbethatduetointernaldistressthey
mightnotbeabletodelivertheservices.Thuspreneedwillnot
makemechoosethemduetologicaldecisionmaking

How much acquisition has SCI done (and is it likely to do)?

Ithadboughtbritishfuneralcompany,GreatSouthernfor$200mn
also.ItwantedtoacquireLoewenasitwasamongoneofthefour
largestfirminthedeathcaremarket.

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TheLoewenGroup,Inc.(Abridged)

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