Loewen Case Summary

Loewen Case

        The Loewen group is the second largest funeral home company in North America. It has 1100 funeral homes, more than 400 cemeteries in the U.S. & Canada. However, with all of its great success from its multiple locations, it still is amidst a financial crisis. The Loewen group is a classic case of Icarus, the classic Greek tale of the prisoner who flew to close to the sun, his wings melted, and fell to his demise. The same thing can be stated for the Loewen group, a funeral company that expanded to fast, without a lucid way to pay for the growth. The problem came by the Loewen group financing their acquisitions aggressively with debt.

        In the death industry, sales are assumed on a “pre-need” basis. This is from a large group of a generation all reaching high probability of mortality. A good example are the baby boomers from the 1950’s and 1960’s who were coming into their 50’s. A large amount of revenue came from backlog. This excess cash flow was used for investments or insurance policies.

        As Loewen grew bigger, it drew more attention from its competitors. SCI was the biggest company in the death industry and the time. It is said that SCI viewed Loewen as a serious competitor. Due to Loewen’s success, it was able to go public on September 17, 1996. The company had closed the day prior at $33.75. By the end of the day the stock was trading just shy of $40. The very same day the company went public, SCI made announced a takeover bid for Loewen at $43/share. Loewen rejected the offer saying that the company was undervalued from a court issue that took place in Mississippi. Two weeks later SCI increased its bid size to $45/share, but it was again rejected by CEO Ray Loewen saying that the “minimum price the shares should be worth is $52/share.”

        The Loewen group continued to expand from 1996-1998. Acquiring their fourth largest competitor Prime Succession Inc. The Loewen Group decided to finance this acquisition, along with the many more ahead, with debt. While The Loewen Group aimed to keep their long term ratio within their set parameters (1.4 : 1), the compounding debt led their competitor to withdraw their offer, citing “Loewens high debt financing as a major deterent”. During the phase of aggressive growth in 1997, which was financed with debt, The Loewen Groups Interest expense increased by 41.9%.