This Tutorial has solution to the Harvard Business Scholl case study "Loewen Group Inc"
Case: LOEWEN GROUP, INC.
MAKE SURE YOU HAVE THE CORRECT VERSION OF THE CASE: 9-201-082 MARCH 4, 2002 THE LOEWEN GROUP, INC (ABRIDGED)
Learning Objectives :
Understanding how rapid growth financed by debt can lead to bankruptcy, understanding basics of bankruptcy laws, understanding procedures for corporate reorganization.
Consider this a final project. Do the work based on what you learned so far in this course.
1 Tease out the information that shows how Ray Loewen went wrong with his acquisition strategy.
a First, figure out by how much he overspent, by using 'normal' acquisition multiples instead of the 'actual' acquisition multiples.
b Then, deduct the 'overspending' from the debt outstanding in the balance sheet as of December 1998, and the 1998 interest on the 1998 income statement.
c Finally, conclude whether or not the bankruptcy could have been prevented if Ray did not overpay for the acquisitions.
2 Assume that this case is about overexpansion of a hospital chain instead of a funeral chain. You sit on the finance committee, the only member with a MBA. Explain to your colleagues how to evaluate the PRIME SUCCESSION deal (think of it as acquiring a hospital instead of a funeral business). Along the lines of the Hansson Private Label analysis, calculate the NPV and IRR, interpret the results, and prepare short explanations for your colleagues about the discount rate, change in NWC, CapEx, and Terminal Value. Then, make a recommendation.
3 Using the FCF Valuation methodology, determine the value of the cost savings Robert Waltrip of SCI anticipated, as described in the first two paragraphs on page 5 of the case. Then, justify the premium offered by SCI, described in Exhibit 7, as of September 1996.
4 As of January 1999, the most likely next step is reorganization (recapitalization) using a Chapter 11 Bankruptcy proceeding - allowing protection from the company's creditors as it works to reorganize the business. The goal is to rise out of bankruptcy, with a capital structure (long term debt and equity) aligned with a sustainable level of EBIT.(Recall the 'new' GM bankruptcy and reorganization.)
a Putting yourself in the shoes of John Lacey, develop a forecast of EBIT that is sustainable and reasonable going into the future. Pages 2 and 3 of the case discuss the predictability of the death care business. Use the Q4 template for your forecast. Justify your results.
b Use your EBIT figures to estimate debt capacity over the 5-year planning horizon, using the debt capacity box at row 62 in the next tab (Financing-Debt Capacity). Justify your results.
c Most likely, some of the assets assembled by Ray Loewen during his acquisition binge will be sold off, divested, consistent with the new level of EBIT going into the future. Make a guestimate, rough, of the amount of divesture - using revenue to asset ratios or whatever else you can creatively use. Cite your estimate of dollars raised via asset sales, and explain briefly.
d Use the cash raised via asset divesture to reduce long term debt, and compare the remaining debt to the debt capacity you calculated for Q4-b above, and interpret your results.
e As John Lacey, consider the pros and cons of the forecasting you did, and the likelihood of Loewen Group's post-bankruptcy success.