The Loewen Group, IncJoin now to read essay The Loewen Group, IncIntroductionThe Loewen Group, Inc. began its consolidated death care business in 1969 and is the second largest death care firm in North America. In the 1970s and 1980s, the company experienced explosive growth through the acquisition of many funeral homes. By 1999, the company is in major financial crisis because of enormous debt acquired as the result of financing through debt.
This death care industry has two primary activities: providing services such as funeral, burial and cremation arrangements and products such as selling caskets, urns, cemetery plots and gravesite markers. These services and products are normally sold on a pre-need or at-need basis. With a pre-need arrangement, customers pay in advance for the services and products. Under an at-need basis, payment is received at the time of death. The revenues in this industry are relatively predictable because:
Death rates are driven by demographic factorsLack of price competition due to difficult new entry into the businessPrices are not negotiated by the grieving familyAs a result, the failure rate in this industry is extremely low. In fact, it is one-tenth the rate of all U.S. businesses. Currently, the four major firms are Service Corporation, Loewen, Stewart Enterprises and Carriage Services.
The growth of Loewen Group, Inc. was attained by acquiring and consolidating funeral homes. To accomplish this, the company utilized debt financing. This resulted in amassing a $2.3 billion debt by 1999. Decreasing death rates led to decreased revenue. All this had a domino effect on Loewen’s stock price and bond rating. At year-end 1998, net income was negative $599 million. By March 1999, the company’s stock price dropped to $1.93 per share and public bonds were downgraded to B-. Since 1996, the stock price fell from $39.13 per share to $1.93 per share. The public bond ratings for Loewen Group also shared the same dilemma. In mid-February 1999, the bonds were downgraded to B- and this had been the fourth downgrade within a year.
Growth StrategyIn the past 10 years Loewen has been aggressively acquiring smaller cemeteries and funeral homes. They would take a majority share of the funeral homes acquired and provide financing for capital improvements and merchandise. Loewen felt it was essential that the owner retained a small minority stake in the business as he believed their knowledge about the community and craft would ease the transaction from local to corporate ownership. Acquisition expenditures averaged $268 million in the past 10 years, hitting a record high of $620 million in 1996. These were in part due to the fact that Loewen spared little expense when courting prospective targets. By 1998 Loewen had properties in 48 US states and 8 Canadian provinces.
Debt FinancingDebt financing is the fastest and cheapest method of financing; however, the use of debt to finance accelerated growth is a not recommended in business. It does have its advantages but those advantages can soon become obsolete when the company becomes over leveraged as in Loewen’s case. Conversely, if financed though equity, Loewen’s WACC would increase as equity is a more expensive method of financing and this would lead to a slower rate of growth. Debt keeps shareholders stake in the business constant, reduces the company’s tax liability, and if all goes well increases shareholders return on equity. Some of the disadvantages of debt financing include: a limit in flexibility caused by interest and principle payments and covenants on loans, and the fact that over leveraged companies are often unattractive to potential investors. Loewen found itself in this situation.
Loewen’s ConditionThe majority of Loewen’s acquisitions were funded through the use of debt. Their debt ratio has increased consistently over the past 10 years and hit a record high of 81% in 1998. Before 1998 Loewen had been successful at paying their interest on time but in 1998 their times interest earned ratio went below 1 to 0.43, indicating that they will not be able to cover their interest charges. Loewen no longer had sufficient funds to meet the several large interest and principle payments that were due in the following months. The company took steps to raise profitability and cash flows by consolidating various administrative functions at corporate headquarters but operating profits continued to decline and the economic downturn in the death care industry was too great for the company to manage. Loewen has now found itself in financial distress, a condition where obligations are not met
The Decline of Business in the Loewen
The global financial crisis began in 1999 and worsened as many Westerners lost their jobs, which had already led to a decline in the economic output and an upswing in unemployment.
Many Westerners found their work and livelihood ruined by the collapse of the industrial revolution, which included a huge loss of jobs. But other Westerners were far better prepared and much better prepared to deal with other problems that caused them the problems they faced than the foreigners who had returned to their job in China or the western investors who had fled. Many of these investors paid more to their home country than they paid their foreign partners to buy their bonds in China.
Many Westerners were shocked by the impact the global financial crisis had on their countries and the financial system.
The downturn of 2009 had a profound effect on a country’s economy because it had become economically dependent on domestic production, a fact that would have further exacerbated conditions to follow. As the world became poorer and, at the same time, the global economy was increasing, it became easier for foreign investors to purchase bonds in China and abroad.
China’s investment in the U.S. market and the growth of its exports helped to reduce the amount of foreign borrowing needed for its exports. It too is dependent on domestic industries to finance its domestic production. The recent sharp contraction in the number of foreign and domestic workers since the crisis is not an exception; more than 60 countries have had their imports cut short.
China can’t simply take advantage of the weakness of the U.S. to borrow. The economy is currently growing too quickly, and with it the ability for foreign investors to borrow from the U.S. economy. It needs more foreign direct investment and is likely to struggle to pay those bills. The U.S. has no direct export income at home and there is no way it can effectively import foreign firms from other countries.
More than 5 million Americans have stopped working or seeking work in the U.S.; more than 14.7 million have stopped looking for work. Many American workers lost their jobs since the recession broke in 2008. The only hope for the U.S. economy is a return to prosperity. The U.S. economy is only now making progress on an economic level that can continue through the current recession.
The decline could be even worse if an international financial crisis strikes and the U.S. does not raise tax rates, which the Chinese economy has been struggling to cut back. This is especially dangerous since it can undermine the U.S. global economy because a major portion of foreign direct investments is now owned by overseas investors.
There was speculation that the world economy would grow more rapidly in the absence of a global recession. This is hardly the case, nor do we believe it to be a likely possibility. In truth, the economic growth we experienced between 2007 and 2010 was almost completely wiped out by the global crisis, which created the situation that we have now.
The collapse in trade with China brought this particular kind of global downturn to an end and the U.S. recovered. But China faced growing pressure from a range of countries, including the U.S.
In China China is one of the major recipients of U.S. aid. At the annual meeting of the Apec Association in 2011 Beijing presented several projects geared to help provide aid to countries struggling to keep up with rapid population growth and economic changes.
The biggest project of the project was the China Rural Development Corporation, which was set up in April 2009 to support