Loewen Group Case Analysis
Source of Loewen’s financial problems in 1999
Loewen group faces the very difficult times in 1999. In 1998 the financial position of the company became very weak due to the high debt ratio and lower interest coverage ratio. The company faces the risk of bankruptcy. The company also faces a decline in the prices of bonds and stocks in the marketplace. Due to the weak financial position of the company no one wants to invest in Loewen group corporation. In the year 1999, the corporation faces the many problems they are discussed below.
Financial problem due to rise in leverage
Loewen group mostly invests money in a lot of acquisitions. The debt of the corporation continuously increases from 1989 to 1998. The debt ratio of the corporation increased from 58% to 81%. This rise in debt affects the image of the corporation negatively. The cash available in the company was not enough to fulfill its obligations of the company. The interest expenses also increase and the coverage of interest expenses declines from 2.61 to 0.91 as shown in the above table.
The decision to Refusing the SCI’s takeover proposal
In the year 1996, the SCI offer the Loewen group to acquire but the proposal of SCI was rejected because of the pride of the management they think that their corporation was undervalued. That was the wrong decision of the Loewen group. The SCI offers a good amount to the company for an acquisition they offer the fair value of all the stocks of the company.
Increased Cost of Conditional obligations
In the year 1995, the company faces an unexpected judgment from the board of directors. The company has to pay the $500 million of debt for the punishing compensations. Another huge debt of $87.8 million was also incurred on the company for those properties which they acquire and also for the farmer-owners for confident cremations.
Impotent to control the expansion of business
Loewen group rapidly acquires mausoleums and homes for the expansion of business but the management of the company is unable to manage and control the expansion of business and properties. The part of mausoleums business was completely declining. The management of the company neither controls the expansion of business nor the assets of the company.
Loewen’s Alternatives for the current problems
By understanding the current situation of the company few alternatives are to be given for rising the funds of the company so that it can meet with the obligations.
Alternative 01 Issuing of new capital
The company must issue the new shares which may be some of the corporates or investors like to purchase from the Loewen group company. The amount that comes from shares can help the company to meet its long-run obligations. In the condition of losses, this is very tricky to offer new capital in the marketplace.
Alternative 02 Issuing of new Equity
Another alternative for the company is to issue the new equity it is also very complex for the company because currently, they are facing many macro problems. The financial performance of the company is also weak.
Alternative 03 Selling of Assets
The Third alternative is the selling of assets of the company. The Debt is very high and the company is reliable to pay all the debt at a proper time so the company can take advantage of available sources. The cash generates from assets helps the company to meet its obligations.
Alternative 04 Sell the Loewen Group Corporation
The other alternative for overcoming all the problems is to sell the company. The owner of the company thinks about this alternative. The corporation is already going downhill the debt is too high and the brand image and corporation recognition have also become weak in the marketplace.
Alternative 05 Filing for Bankruptcy
The last alternative for the company is to file for bankruptcy in this the company can take advantage of the continuation of operations and improve their finances because after filing for bankruptcy the company can get low attention from debtholders. But the company can face problems in Canada because in that country the bankruptcy is not considered to be favorable.
After analyzing all the alternatives and understanding the current situation of the company we recommend that alternative number 04 is best for the company. The Loewen group corporation, not only lost its market value and customers but also faces less attention from investors and a heavy burden of debtholders. The amount of debt is very huge and can only be paid with higher equity. The owner of the corporation must sell the company and can start a new business from the remaining amount of money after paying off debt to the debtholders.
In the last we conclude the case that Loewen is the leading company in the wholesale building material industry it is a Canadian private company that earns a good revenue in a certain period. As the market becomes more compatible the company faces many issues. The corporation was expanding by acquiring a lot of properties but the company was unable to control the expansion which leads to the failure of the corporation and taking it towards the stage of bankruptcy. The number of debt increases from year to year reaches the stage of 81%. The company was unable to cover the interest expenses. By understanding the current situation of the company few alternatives are also given for resolving the issues of the company through which alternative 04 is recommended for the betterment of the company…..
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