Loewen Answers

The Loewen Group, Inc. (Abridged) (Session 6)

1. Examine Exhibit 4. How was Loewen able to grow so explosively in the 1990's? Quantify - from 1989 to 1998, (cumulative), how much did it spend on acquisitions, capex and dividends and where did money come from in US$?

Loewen Group main reason for explosive growth came from acquisitions

* Partnered with Blackstone group to acquire Prime Succession Corp, 4th largest funeral service provider. Purchase Price was USD 320 million. Acquired Rose Hills Cemetery, largest in North America for 285 million of which USD 155 million was through debt.

* 1996: Acquired 159 funeral homes, 136 cemeteries and 2 insurance companies for a total of USD 620 million

* 1997: acquired 138 funeral homes, 171 cemeteries and 1 insurance company for USD 546 million. Entered UK in the same year acquiring 32 funeral homes

* 1998: Acquired 89 funeral homes, 65 cemeteries for total of USD 278 million

Raised money from long-term debt (most of it collateralized) and equity. This is evidenced from the debt and equity (both book value and market value) growth rate in Exhibit 4.

2. Why is Loewen in trouble in 1999?

a. Describe business conditions

Loewen is in trouble in 1999 with respect to the following reasons:

* Large debt outstanding

* Fall in stock price at the end of 1998 (from USD 25.75 to USD 8.4)

* Increase in write-offs and doubtful accounts

* Large contingent and other liabilities outstanding (non-competition agreement payments)

* Debt covenants were incompliant and the they followed cross-default covenants (defaulting on one covenant meant default on all the other covenants)

* Decline in death rates

b. Characterize acquisition activity

* Retention of minority stake of the seller in the business

* Non-competition agreement

* Aggressive acquistions using Cross-default debt covenants

* Financing for capital improvements and increased merchandising...