Loewen Case

This growth through acquisitions was funded primarily through debt which was evident as long term debt increased $922. Lion from 1994 to 1998; this was a 195. 88% increase. One benefit of debt financing was that it provided a tax benefit. From 1994 to 1998 Lone had paid $488. 6 million in interest. Lowness tax rate was 45% therefore; debt financing resulted in a tax savings of $219. 87 million. Another advantage of debt financing was that It did not afford the lender ownership. Therefore, the lender had no say In how one’s business was conducted. In order for one to reap the benefits of debt financing though one must be able to comply with all aspects of the debt agreement.

When unable to do so the consequences can be devastating too equines. Unfortunately, aggressive growth through debt financing did not bode well with the Lone Group. With the 30% average revenue growth one would expect to see their earnings grow too, but this was not the case. Lone lost $599 million for 1998 compared to earning $43 million the previous year, an approximate 149% decline in one year. Within 5 years of the start of their “acquisition frenzy” of larger established funeral chains they were facing what one in the financial world would call “financial distress”.

Financial distress is defined by Investigated as “A condition where a many cannot meet or has difficulty paying off its financial obligations to its creditors. The chance of financial distress increases when a firm has high fixed costs, illiquid assets, or revenues that are sensitive to economic downturns. ” Lone Group unfortunately had a few of the above Issues and then some. Fixed costs for funeral homes were approximately 65%; this was due In part to the fact that a funeral home may only have one to two funerals a week but still had to be maintained.

Their competitor, SIC, would “cluster” the funeral homes together which reduced fixed costs to an average of 54%. 4% is still high but better than 65%. Such a plan also afforded SIC the ability to sell off assets, eliminating redundant cost and reducing the total cost of the acquisition. Funeral home assets were not in great demand at this time as the death rate had declined; therefore funeral home assets were very illiquid. Though the above financial distress pre-cursors were in place, internal issues also played a large role in creating Lowness financial distress.

Lowness aggressive acquisition strategy seemed only to focus on the acquisition with little to no thought to the next step of the process. Lowness competitor, SIC, acquired full ownership of all acquisitions whereas Lone took a majority ownership and made payments for the rest to help ease taxes. These calculations were funded largely with debt in which the terms of such debt were very complicated Succession with Blackstone Group. If Lone bought out Blackstone by exercising their option it would effectively pay an amount that would give Blackstone a 24% return on its investment.

Lenses’ ROAR (using actual assets as bag assets were not given) in 1996 was only 1. 83%. This was an extremely high return to negotiate. Blackstone also had a put in which they could sell their stock to Lone using a calculation based on EBITDA. This definitely did not favor Lone due to most acquisitions were purchased largely through debt. Lone did not market the acquisitions instead decided the funds would be better spent on courting independent funeral home and cemetery owners who were potential acquirers. Though they did not market their acquisitions their SO &A increased by 25. 3% to $125. 2 million from 1997 to 1998 whereas their competitor’s SO remained constant at $66. 8 million. Marketing and integrating acquisitions into one’s business are a ere important part of the success of an acquisition. A reversal of $3. 7 million in sales plus a $2. 1 million increase in allowance for loan losses were attributed to the decrease in gross margin. Such an increase in allowance for loan losses would lead one to believe that due diligence in evaluating the collegiality of the accounts receivable of the acquired companies had not been performed.

The $5. 7 million adjustment resulted in a 9. 07% decrease in income for 1996. A lawsuit awarded in the amount of $500 million occurred from accusations of Lone reneging on the purchase of two homes, plus certain insurance services. Lone reported an expense of $165 million for the year to settle this and other lawsuits. Had Lone honored the agreement the properties were only worth a few million therefore, it would have saved them a considerable amount of money. Also, after the announcement of the award Lowness stock decreased in value by 15%.

In 1996, an offer to purchase Lone stock was made by SIC in which they offered to purchase the stock at $43 per share which was $3. 00 per share higher than it was trading for at that time. SIC increased their offer to $45 per share yet Lowness Board of Directors effused the offer stating the stock was undervalued due to the lawsuit. At the end of 1996, Lowness debt/equity ratio was 1. 4:1; company policy was in the range of 1 to 1. 5. Lowness plan was to reduce the debt/equity ratio with equity issues.

Due to concerns over an antitrust lawsuit Lone had filed against SIC and Lowness current high debt to equity ratio SIC withdrew their offer to Lone. This leads us to the Board of Directors who are appointed to act on behalf of the shareholders to run the day to day affairs of the business along with ensuring the availability of adequate uncial resources, evaluating the CEO and approving the budget. One can see from the description of the responsibilities of the Board of Directors that Lowness Board of Directors had greatly failed their shareholders.

Lone, now facing financial distress, as they had not yet missed a payment but had $875 million in debt due the next year, had to determine how best to recover from too much debt, too little death and too little governance. John Lackey, the newly appointed CEO, was to begin his daunting task of bringing Lone back from the brink of death. With $875 million in debt due in 1999 Mr.. Lackey had little time to develop a plan of action. Unfortunately, Lowness original plan of reducing debt by issuing equities was no longer an option as the stock price year; a decrease of 67. 2%. Lone should have given this option consideration earlier and they might not have found themselves in this position. Mr.. Lackeys options all had pros and cons but a decision had to be made and made fast. Option one would be to meet with creditors regarding the soon to be due debt obligations and discuss amending the terms, a workout. Most creditors cringe at the word bankruptcy so that may help to earn the ear of their creditors. Prior to approaching the bank or their creditors, Lone must first determine whether there is any way to turn the business around.

Creditors are normally repaid by future cash flow, new financing, or equity infusion. Lone must first devise a restructuring plan that would demonstrate it can be sustainable on a going forward basis. Mr.. Lackey must review the historical financial of the business and prepare projections of cash flow, profit and loss, and balance sheet through the term of the proposed repayment plan. The projections should demonstrate that the business not only has sufficient ash flow to maintain current operations but also has enough additional cash flow in the foreseeable future that will enable creditors to receive a return on the delinquent debt.

The amount of such additional positive cash flow will determine the amount of time necessary to repay creditors. The pros of this option would be that it would be less expensive than bankruptcy. Bankruptcy would require attorneys, court costs and other expenses. Costs that would have been spent on bankruptcy can be used in restructuring the business. It would also give Lone the opportunity to address the tuition privately between the creditors and themselves. This would hopefully help to minimize negative publicity. The cost of negative publicity knows no bounds.

This option would also buy Lone some time in which to begin the process of possibly selling off less profitable operations and time to evaluate expenses and cut the fat. A workout is also effective in preventing creditors from taking legal action which again would buy Lone some time. The cons of this option would be the terms of Lowness’s debt were very complicated in that the company’s debt was almost all secured, or collateralized by various assets. There were also covenants that restricted the company’s ability to sell assets.

Creditors would have to all agree to the terms of the sale of assets. Lone had a covenant in their bonds that stated if the ownership of the company’s stock changed significantly Lone had to repurchase the bonds for 101% of face value. The scofflaws may not be sufficient to show the company sustainable enough going forward for the creditors. All of these covenants and restrictions would make it difficult to restructure the company’s debt. Option 2 would be to recommend Lone meet with a professional in the equines of securing equity investors for troubled companies.

Pros would be though it may be costly it would still be cheaper than bankruptcy and may be the only option for Lone to continue its operation should no agreement be reached with its current creditors. Cons of course would be the cost. With Lowness current situation equity investors would be hard to come by also. Option three would be to meet with their three main competitors to discuss each entity purchasing some of the acquired funeral homes and cemeteries. This option would allow Lone to sell their assets for cash. Avoid bankruptcy and the additional sots associated with bankruptcy.

Big is not always better. Lone could then focus option would possible be the anti-trust laws. If the sale of assets to Lowness three main competitors was seen as threatening fair competition then the sale could not take place. Another con is again the terms of Lowness debt would make this a difficult task. Option four would be the last resort, Chapter 11 bankruptcy. The con of this option is that it would give Lone the ability to develop a plan to restructure on their terms. Lone would no longer be required to pay interest on unsecured debt.

They would also be able to borrow from new lenders through debtor-in-possession financing. A con of this plan would be the costs incurred to file bankruptcy. Another issue is the company conducted about 10% of its business in Canada where the bankruptcy law made it much simpler for creditors to remove management. Canadian law also only provided one chance to provide a reorganization plan. In conclusion our recommendation would be to develop a reorganization plan showing the company was a sustainable company going forward, positive cash flow would provide payment on delinquent debt and then present it to its creditors for approval.

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