THE L LOEWEN OEWEN GROUP, GROUP, INC.
Case Summary The second biggest playe in the di!ided yet e"ceedingly all#ing U$ de%ise consideation %a&et, Loe'en Go#p beca%e !iolently tho#gh the the ()*+ ()*+s s and () ())+ )+s s by obtai obtainin ning g n#%e n#%eo#s o#s littl little e ad%in ad%inist ista ato tos s -#the%oe ass#%ing contol %oe settled chains in the late yeas. In ())), the taded on an open %a&et Loe'en Go#p possessed %oe than (,(++ %e%oial se!ice ho%es and %oe than ++ ce%eteies in the U$ and Canada, 'ith %ino eso#ces in the United /ingdo%. In light o- co%bination, its opeational %ethod 'as to e"pand its edge by deceasing both alteed and !aiable e"penses. $#pe!isos o- the gained ad%inistatos 'ee &ept to hold thei associations 'ith neaby go#p go#ps. s. 0 b#dgeta b#dgetay y poce poced# d#e e depend depending ing on in1#en in1#ence ce 'as li&e'is li&e'ise e inc ince% e%en enta tall -o -o Loe'e oe'en ns s 2#ic 2#ic& & de!e de!elo lop% p%en ent. t. It ga!e ga!e the the obli oblige ged d cash1o' to de!elop%ent 'hile gain-#l d#ty shields and highe et#ns 'ee 'ee %ade. %ade. $#ch $#ch achi achie! e!e% e%en ents ts %o!ed %o!ed the the enth enth#s #sias ias% % o- $CI, $CI, the the ogani3ations geatest i!al that %ade a geneo#s o4e to obtain Loe'en Go#p in $epte%be ())5. To co#nte the assa#lt, Ray Loe'en 6 the CEO ao#nd then and bene7ciay o- the ogani3ation oiginato 6 2#ic&ened its obtaining poga% 'ith a speci7c end goal to b#ild 7% estee% eno#gh to -oestall -#the endea!o#s o- $CI. In () ()) )8, nonetheles less, the ogani3 ni3ation ions s gea geatt b#dge #dgettay cic# cic#%s %stan tance ce bega began n to disin disinteg tega ate te,, %ost %ostly ly beca# beca#se se o- the the con9o con9oint int negati!e i%pacts o- co#pting econo%ic sit#ations, e"taodinay case costs, costs, e"ces e"cessi!e si!ely ly libeal libeal po7t po7t aan aange% ge%ent ent and aisin aising g enth#si enth#sias% as% ad9#s ad9#stin ting g -o% -o% o!e o!ep pice iced d ac2# ac2#isi isitio tions ns.. The The ())5 ())5 to () ())* )* obta obtain ining ing pei peiod od t# t#ned ned o#t o#t to be cons consid ide eab ably ly %o %oe nega negati ti!e !e -o -o both both the the co%pan co%panys ys bene7t bene7t and #tili3ing, #tili3ing, as the 7% 7% 'ent 'ent ahead ahead to p#chas p#chase e %#ch %#ch bigg bigge e and and %o %oe o!e o!ep pic iced ed pass passin ing g ca cae 7%s 7%s th tho#gh o#gh the the #til #tili3 i3at atio ion n o- pog pogessi essi!e !ely ly la!i la!ish sh obli obliga gati tion on.. Loe' Loe'en ens s e4ec e4ecti ti!e !ely ly estiction to the $CI ta&eo!e conse2#ently had a go at an #ns#stainable e"pense. In ())*, aggegate liabilities had t#ned into si" ti%es bigge than than the b#sines b#siness s secto secto esti%a esti%atio tion n o- !al#e. !al#e. The ogan ogani3at i3ation ion o!e6 o!e6 dependence on shot6 te% obligation had intensi7ed the cic#%stances to a poin pointt that that a :) :)+ +.; .; %illi illion on obli obliga gati tion on 'as 'as e"pec "pecte ted d in () ())) )),, ep epese esentin nting g appo appo"i% "i%atel ately y *<= o- ())* ())* deals. deals. >oeo!e >oeo!e, , contac contacts ts sec# sec#ing ing c#e c#ent nt obliga obligatio tion n 'ee 'ee %a&i %a&ing ng oblig obligat atio ion n eb#il eb#ildi ding ng and and additionally enegotiating #nthin&able. ?y and lage, Loe'en Go#ps disappoint%ent 'as pi%aily beca#se
o- a -oc -ocee-#l #l de!el de!elop op%e %ent nt aa aang nge% e%en ent. t. The The abno abno% %al al a%o# a%o#nt nts s o- obligation obliged contin#ally de!eloping bene7ts and -ee tade stea%s in -o spendable spendable do#gh e2#est e2#est to consent consent to de!eloping ei%b#se%en ei%b#se%entt d#ties. Loe'en, on the othe hand, did not s#cceed in enhancing lac&ing opeational techni2#es. 0t the point 'hen 7nancial specialists consideed that, oblig ligation ion and !al#e l#e 7nanc ancing o- ac2# c2#isitio tions got to be pog pogess essi!el i!ely y to#b to#bleso leso%e %e and the de!elop de!elop%en %entt %ethod %ethodolog ology y o- the ogani3ation ca!ed in at last. Con-onting a deadly b#dgetay cic#%stance, ecently selected CEO @ohn Lace Lacey y 'ill 'ill %ost %ost li& li&ely not not be capa capabl ble e to e7nan e7nance ce the the ogan ogani3 i3ati ation on 'itho#t doc#%enting -o %#lti69#isdictional li2#idation in ())). $#ely, Chapte (( ass#ance ass#ance see%s, by all acco#nts, to be the best 'ay to gi!e the ogani3ation the ti%e to eaange and e7nance, c#t e"penses and o4e eso#ces. It 'ill pe%it %a&ing an aange%ent -o e!a%ping 'hile &eeping b#siness going tho#gh post6appeal ban& bene7t and e"ec#toy contact poc#e%ents. @ohn Haleys top need 'ill in this %anne be to begin getting eady -o the li2#idation ecoding, 'hile discading a -e' ad!ant ad!antage ages s -o -oest -oestall all #pt# #pt#es es o- conta contacts cts be-o be-oe e the pog pogess essing ing begins. Growth strategy of the group groupAA Consolidation and Pe6Needs $ales Loe'en Go#p e%#lated a poced#e o- de!elop%ent that s#passed the de!elop%ent o- the b#siness -o death consideation bene7ts by a 'ide %agin. The b#siness secto all things consideed eg#laly 9#st o4es const constaine ained d de!elop de!elop%en %entt oppot oppot#nit #nities ies 'ith 'ith the 2#anti 2#antity ty o- passin passingBs gBs e!ey yea e"panding by +.*= since ()5+. Then again the b#siness 'as and still is e"ceedingly di!ided. Thee ae n#%eo#s little playes, 'ho bing abo#t elati!ely high alteed e"pense. These can be di%inished, i- a -e' ogani3ations ae solidi7ed, a poced#e that 7st 'as e"ec#ted by $e! $e!ice ice Cop Copo oat atio ion, n, Loe' Loe'enB enB s geat geates estt i!al i!al the they y acco acco%p %plis lishe hed d a no%al decease o- alteed e"penses -o% 58= to 8= o- inco%esD. The teitoy o- peneed deals has been an altenate de!elop%ent oppo oppot t#n #nit ity y be-o be-oe, as indi indi!i !id# d#al als s pog pogessi essi!e !ely ly poc poc# #ed ed de% de%ise ise consideation bene7ts be-oe thei gen#ine passing the shaes in b#ial se!ice and ce%etey inco%es de!eloped -o% <<= to (= and -o% 5(= to 8= indi!id#ally so%e'hee ao#nd ())8 and ())*D. Ceating %one %oney y st stea%s ea%s be-o be-oe e endei endeing ng the the ad%ini ad%inist sta ati tion on 'as 'as a !al#a !al#able ble eaction o- this plan o- action. 0lso, the b#siness o- death consideation ad%i ad%ini nist sta ati tion ons s o4e o4es s a high high le!e le!ell o- depe depend ndab abil ilit ity y. Inco Inco%e %es s ae ae e"te%ely #ns#pising beca#se o- steady de%ise ates and an absence
o- !al#e i!aly and pieces o- the pie ae not diFc#lt to &eep on the go#nds that thee ae high obst#ctions o- section c#sto% and notoiety ass#%e an eno%o#s patD. 0s a #le, #le, Loe' Loe'en en Go# Go#p p 'o& 'o&ed ed in a not not e"ce e"cess ssi!e i!ely ly agg agges essi si!e !e b#si b#sine ness ss sect secto o,, 'hic 'hich h o4e o4eed ed,, on the the othe othe hand hand,, 9#st 9#st est estic icte ted d potenti potential al -o de!elop de!elop%en %ent. t. Thei Thei de!elo de!elop%e p%ent nt 'as chie1y chie1y in !ie' o- ac2#isitions o- little contendes, a poced#e that s#ggested high needs o- capital. Loe'en conse2#ently began aising capital by iss#ing high %eas# %eas#es es o- obligat obligation ion -#the -#the%o %oe e !al#e. !al#e. The stoe stoes s -o% -o% opeat opeations ions 'ee ins#Fcient to -#nd the ac2#isitions inside s#bsidi3ing 'o#ld ha!e 9#st e%po'eed a s%all a%o#nt o- the gen#ine de!elop%entD. Inte Inteest estingl ingly, y, in the opeatio opeational nal seg%en seg%ent, t, Loe'en Loe'enBB s de!elop de!elop%en %entt techni2 techni2#e #e conta contaste sted d gene geneo#s o#sly ly -o% -o% its biggest biggest i!alA i!alA The pe!io pe!io#s #s entepene#s 'ee no%ally #tili3ed as diectos and held a high le!el o- sel-6s#F sel-6s#Fcien ciency cy.. inancin inancing g 'as acco%% acco%%odat odated ed capita capitall change changes s 'hile 'hile -oce-#l deals stategies 'ee e!aded. Whats %oe, pe!io#s %anages gene geneal ally ly held held a %ino %inoit ity y sta& sta&e e in thei thei old old oga ogani3 ni3at atio ions ns and ando o got Loe'en stoc& as a -eat#e o- the pice. Debt Financing: Advantages Associated With It In the conte"t o- thei go'th stategy Loe'en Go#p iss#ed lage a%o#nts o- debt, d ebt, incl#ding both ban& loans and p#blicly taded bonds. The %a9o ad!antages ad!antages o- debt 7nancing en9oyed by Loe'en ae the -ollo'ingA
Pretax income
1989
1990 1998
1991
1992
1993
1994
1995
1996
1997
11.0
18.5
27.6
32.7
43.5
60.9
-116.8
100.1
52.5
4.8
7.5
11.1
12.2
15.6
19.7
-47.2
29.1
2.7
43.6%
40.5%
40.2%
37.3%
35.9%
32.3%
40.4%
29.1%
5.1%
-21.7%
21.7
127.5
182.3
756.4
Taxes paid -164.5
Tax Rate nterest expense
8.2
12.4
17.1
19.8
Tax s!ie"d
3.6
5.0
6.9
7.4
7.8
34.2
11.1
53.6
21.7
91
26.5
6.6
-
39.6
Tax shieldsA shieldsA Loe'en inc#ed high ta" shields as the le!el o- debt 'as constantly go'ing. The ta" ate, ho'e!e, 'as deceased by tend as
net inco%e inco%e 'as deceasin deceasing. g. Patic#la atic#laly ly d#ing d#ing the last yeas, yeas, the -#ll potential o- the ta" shields co#ld thee-oe not be ta&en ad!antage o- Provision of reuired capital: ebt -#nding only enabled Loe'en to %a&e %a&e thei thei n#%eo n#%eo#s #s ac2#is ac2#isitio itions ns and thee thee-o -oe e gain gain a s#pei s#peio o %a&et shae co%paed to all co%petitos b#t $CI. The position in the %a&et also entitled the% to potential opeational bene7ts that %ight ha!e not been e"ploited in thei entiety !ow ris": ris": The sec# sec#e e %a& %a&et et en!i en!ion% on%ent ent o- Loe'e Loe'en n Go#p Go#p see see sectio section n aD as 'ell 'ell as thei thei 7nan 7nanci cial al healt health h #ntil #ntil the the () ())+ )+s s pob pobab ably ly enabled the% to inc# lo' inteest ates. ebt 7nancing 'as thee-oe a !ey cheap 'ay o- 7nancing. #ignallingA #ignallingA ebt ebt 7nan 7nanci cing ng in cont conta ast st to othe othe so# so#ce ces s o- 7nan 7nance ce #s#ally signals stength to the capital %a&et. 0s a conse2#ence thei sha sh ae e pice pice %igh %ightt ha!e ha!e bene7t bene7ted ed -o% -o% the poli policy cy o- debt debt 7nan 7nancin cing, g, 'hich is con7%ed by the constant incease #ntil ())5.
$eco%%endations o# possibilities o- obtaining -#nds e%egeA (. Iss#an Iss#ance ce oo- ne' ne' capita capitall <. $ale o- assets assets to ei%b# ei%b#se se debt holdes holdes at least patia patially lly ;. inding an in!esto in!esto to b#y b#y the co%pany co%pany . iling iling -o -o ban& ban&#pt #ptcy cy Issuance &f 'ew (apital Geneally, t'o &inds o- capital can be iss#ed. Raising s#Fcient -#nds 'ith ne' debt is pactically i%possible d#e to the easons na%ed abo!eA li%ited options to pledge ne' assets, n#%eo#s e"isting co!enants, 9#n& ating by $JP, a ecent -all o- ;+= in bond pices and an inade2#ate ability to geneate po7ts and -ee cash 1o's. P#blic in!estos as 'ell as ban&s 'ill not be 'illing to accept these is&s at acceptable conditions -o Loe'en. They 'o#ld ha!e to accept the old debt holdes to be senio to the% the% 'hil 'hile e old old debt debt hold holde es s 'o#l 'o#ld d ha!e ha!e to be con! con!in ince ced d to pe pe%it the the iss iss#anc #ance. e. Pesen esentt -ail# ail#e to nego negottiate iate a debt debt est#ct#ing 'ith the ban&s %a&es that see% highly i%pobable. On the the othe othe hand hand,, iss# iss#in ing g e2#i e2#ity ty is e2#a e2#all lly y diF diFc#lt c#lt..
inancial inancial atios, atios, %issing %issing t#st by in!estos, in!estos, debt co!enants co!enants and the the ecen ecentt dete deteio ioatio ation n o- the the stoc stoc& & pic pice e 'ill 'ill not not allo allo' ' geneating s#Fcient -#nds by a seasoned e2#ity o4eing. E!en dil# dil#ti ting ng pes pesen entt e2#i e2#ity ty hold holde es s by )+ )+= = 'ith 'ith a 555 %illi %illion on o- sha sh aes es iss# iss#an ance ce 'o#l 'o#ld d gene genea ate te less less than than :( :(.< .<*8 *8 bill billio ion. n. >oeo!e, the old shaeholdes 'ho ha!e 9#st 'itnessed the pice dop -o% o!e :+ to :(.); ae li&ely to be el#ctant to in!est -#the cash in Loe'en. #ale &f Assets Raisi aising ng la lage a%o# a%o#nt nts s o- cash cash th tho#gh o#gh asse assett sale sales s 'ill 'ill be e"te%ely diFc#lt, too. The n#%eo#s co!enants concl#ded to sec#e sec#e e"isting e"isting ban& debt and sec#ities sec#ities s#bstantial s#bstantially ly li%it the n#%be o- assets 6 ce%etey and -#neal ho%es 6 that co#ld be sold, sold, as the the %ost %ost !al#ab !al#able le ones ones ae ae al aleady eady pled pledge ged d and and the the co%pany 'o#ld not be -ee to sell the%. >oeo!e, the co%ple"ity o- the ac2#isition agee%ents 'o#ld pobably not allo' lo' -o a 2#ic& sell. The ecent license s#spensions -o acco#nting !iolations in loida as 'ell as the %a9o 'ite6do'n o- big pats o- Loe'ens assets 'ill also send bad sig signal nals s to potent potential ial b#ye b#yes s.. Tho Thoo# o#gh gh pe6 pe6ac2 ac2#i #isi sitio tion n d#e d#e diligen diligences ces 'ill be the least least to be e"pect e"pected, ed, 'hich 'o#ld %a&e things e!en %oe co%plicated gi!en the ti%e pess#e Loe'en Go#p -aces. #the% #the%o oe, e, ongoing ongoing anti6t#s anti6t#stt in!estigat in!estigations ions by both -edeal and state a#thoities against $CI co#ld eli%inate a potentially i%potant b#ye. 0 last poble% to %ention is the &no'ledge o- pospecti!e p#chases abo#t Loe'ens poble%s. They ae thee-oe thee-oe li&ely li&ely to ta&e ad!antage ad!antage o- the the sit#ation sit#ation and to #se thei bagaining po'e. po'e. •
#elling The (o%pany
$i%ilaly, apid sale o- the 'hole co%pany see%s #nli&ely. The edeal Tade Tade Co%%ittee Co%%ittee o the U$ epat%ent o- @#stice %ight not allo' a llo' selling Loe'en to $CI, 'hose shae e"change o4e at 8: pe shae 'as e-#sed t'o t'o yea yeas s ago ago. 0p 0pa att -o% -o% thes these e pob poble le%s %s,, $CI $CIs s 'illin 'illingn gness ess to b#y Loe' Loe'en en is !ey !ey 2#es 2#esti tion onab able le gi!e gi!en n the the high high le!e le!ell o- debt debt and and the the ope opeati ation onal al pob poble% le%s s o- the the taget taget.. Othe Othe playe playes s in the the %a& %a&et et ae ae pobably too s%all to po!ide the -#nds necessay to b#y and est#ct#e Loe'en Go#p. In addition, debt6holdes co!enants 'o#ld incl#de a cla#se speci-ying that a change o- contol is consideed to be an e!ent o- de-a#lt, de-a#lt, es#lting in i%%ediate te%ination o- the loan. Filing For )an"ruptcy Thee-oe, placing the 7% #nde Chapte (( potection, be-oe the 7% goes totally ban&#pt ban&#pt and eaches eaches insol!ency insol!ency sho#ld sho#ld be @ohn Laceys Laceys 7st pioity. 0s Loe'en Go#p also has opeations and assets in Canada
and in the U/, it sho#ld ty to 7le -o ban&#ptcy si%#ltaneo#sly in each co#n co#nt ty, y, to pe! pe!en entt its its ced cedit ito os s -o% -o% ceas ceasin ing g U/ and and U$ asse assets ts in esponse esponse o- the 7% 7ling -o ban&#ptcy ban&#ptcy in the U$. ?eca#se ?eca#se o- potential 9#isdictional con1icts con1icts and di4eent di4eent ban&#ptcy ban&#ptcy la's, @ohn Lacey %#st as& 2#al 2#ali7 i7ed ed lega legall co#n co#nse sels ls to g#ide g#ide the the 7% 7% th tho#gh o#gh lega legall plan planni ning ng and and poceedings.
