Case2-Loewen Group-Capital Structure

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The Loewen Group, Inc. (Abridged)

In March 1999, John Lacey and the management team at the Loewen Group, Inc., had to decide what course of action to take in light of the company’s imminent financial difficulties. On January 22, 1999, Lacey, a renowned turnaround specialist, was appointed chairman of Loewen, the second largest death care company in North America. Headquartered in Burnaby, British Columbia, Loewen owned over 1,100 funeral homes and more than 400 cemeteries in the U.S. and Canada; it also owned 32 funeral homes in the United Kingdom. The company had come a long way since its modest beginnings in Canada, where Ray Loewen, the founder (and, until recently, chairman and CEO), started out helping his father run the family funeral business in the late 1950s. During the last two decades, Loewen Group had grown explosively, mainly by acquiring small independent funeral homes and cemeteries in densely populated urban markets; in recent years the company had also acquired several large established funeral chains. Over the last five years alone, consolidated revenues had grown by nearly 30 percent a year, on average, from $303 million to over $1.1 billion.

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Despite its impressive growth, the company faced a major financial crisis. It lost $599 million for 1998, compared to earning $43 million the previous year. Loewen’s on-going acquisitions program had been aggressively financed with debt. At year-end 1998, total debt stood at more than $2.3 billion—more than seven times the amount outstanding five years earlier. Loewen’s common stock, which was simultaneously traded on the New York, Toronto, and Montreal stock exchanges, had ended the year at around $8 in New York, down from roughly $40 at the end of 1996.

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Confronted with the company’s mounting difficulties, in October 1998 the Board of Directors replaced Ray Loewen as CEO; soon thereafter, with the appointment of John Lacey, he was also replaced as chairman. The company also took some steps to raise profitability and cash flows. It consolidated various administrative functions at corporate headquarters and cut management overhead. It reviewed its pricing policies. Finally, it hired investment bankers to explore various financing options, including asset sales, strategic partnerships, and outside capital investments in the company. However, the company’s situation continued to worsen, and in mid-February 1999 Standard & Poor’s downgraded Loewen’s public bonds from B+ to B-, its fourth downgrade in less than a year. Loewen’s stock price dropped 38% that day. In addition, Loewen would almost surely violate certain covenants in its bank debt as a result of the company’s 1998 financial performance, making it necessary to restructure the debt. Overall, in the twelve months prior to February 1999, Loewen’s stock price fell by about 92%, to $1.93, and its bond prices fell by 30%. ________________________________________________________________________________________________________________ This is an abridged version of an earlier case, The Loewen Group, Inc., HBS No. 201-062, which Professor Stuart Gilson prepared with the assistance of Research Associate Jose Camacho as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Material in this case and in the original comes from published sources (public company documents and the general business press) and draws on research by David Gallo, Ian Reynolds, and Collin Roche (all HBS Class of 2000), as reported in their paper, “The Loewen Group: An Autopsy of a Chapter 11 Death Care Company.” Copyright © 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced,...
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