Loewen Case

Loewen Group Over the last two decades Loewen Group, a death care provider, had been growing by acquiring small independent funeral homes and cemeteries in densely populated areas but in recent years the company had also acquired several large established funeral chains. Over the last five years alone, Loewen had embarked on an aggressive growth strategy which accounted for consolidated revenues’ growth of nearly 30% a year on average from $303 billion to over $1.1 billion. This growth through acquisitions was funded primarily through debt which was evident as long term debt increased $922.8 million 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 Loewen had paid $488.6 million in interest. Loewen’s 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 to a business. Unfortunately, aggressive growth through debt financing did not bode well with the Loewen Group. With the 30% average revenue growth one would expect to see their earnings grow too, but this was not the case. Loewen 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 Investopedia as “A condition where a company cannot meet or has difficulty paying off its financial obligations to its creditors. The chance of financial distress increases when a firm has high