The Loewen Group Inc.

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The Loewen Group Inc.

4126 Norland Avenue
Burnaby, British Columbia V5G 3S8
Canada
Telephone: (604) 299-9321
Fax: (604) 473-7330
Web site: http://www.loewengroup.com

Public Company
Incorporated: 1985
Employees: 10,800
Sales: $896.1 million (2000)
Stock Exchanges: OTC Toronto
Ticker Symbols: LOWGQ; LWN
NAIC: 81222 Cemeteries and Crematories (pt); 81221 Funeral Homes; 524113 Direct Life Insurance Carriers; 53121 Offices of Real Estate Agents and Brokers

The Loewen Group Inc. is a funeral service corporation located in British Columbia, Canada. The largest funeral service corporation in Canada and the second largest such firm in North America, The Loewen Group owns and operates 847 funeral homes, 23 cemeteries, 12 crematoria, and three ambulance companies in Canada, the United States, and Puerto Rico. With more than 10,000 employees, the company provides a full range of funeral services, including prearrangement, family consultation, the sale of caskets and related funeral items, the preparation of the body and removal of the remains, the use of a funeral home for both visitation and worship, various transportation services, and, in addition to the traditional burial items, a cremation service.

Early History

The roots of The Loewen Group can be traced to A.T. Loewen, the director of a small funeral home in Steinbach, Manitoba. Opening his business in 1961, Loewen operated a highly successful, but small-volume, operation in a rural area in one of the great western provinces of Canada. When A.T. Loewen fell sick and was unable to continue as director of the funeral home, his son Ray assumed control of the entire business. Ray Loewen had just completed his degree in theology from Briercrest Theological College in Saskatchewan. He had not intended to follow in his father’s footsteps; given the circumstances, however, Ray dutifully continued what his father had begun.

Not satisfied with the state of funeral care and services in Manitoba, Ray Loewen came up with an idea to create a chain of funeral homes that would arrange to share resources such as hearses and services such as body preparation. Unfortunately, not many people were won over by his idea. The young entrepreneur could not find many funeral homes that were willing to become part of a national chain, and the idea of economies of scale was alien to him. Part of Loewen’s initial difficulties in establishing a funeral home chain was the result of unusually high barriers to entering the funeral home business. Because of the longstanding reputations and recognition of family-run funeral homes within individual communities, it was almost unheard of for an outsider to arrive in a small town and suddenly open a funeral home. Therefore, the resistance to the idea of establishing a funeral home chain was disappointing to Loewen, but not altogether surprising.

Unable to fulfill his dream, in 1969 Loewen decided to move his family to British Columbia, where he operated a funeral home and also delved into real estate and transportation businesses. Although he was able to acquire a number of funeral homes during this time, Loewen became increasingly disillusioned with the funeral home industry. In 1975, Loewen abruptly turned over all responsibility and management of his business holdings to one of his most trusted managers and campaigned successfully as a member of the Conservative Party for a seat in the provincial legislature of British Columbia. Loewen served as a member of the legislature for a period of four years and was much admired by his fellow Conservative Party colleagues for his trustworthiness and knowledge of the political issues of the day. In 1979, Loewen left the political arena as abruptly as he had entered it and set up a major real estate development and management company. When the real estate market began to suffer during the early 1980s, Loewen thought he would take another chance at fulfilling his dream of building a chain of funeral homes.

Creating a Company During the Mid-1980s

Loewen had more luck the second time around. In the United States, Houston-based Service Corporation International was in the process of an aggressive acquisitions campaign, buying up funeral homes at a rapid pace across the country. When Service Corporation International entered the Canadian market, funeral home owners in Manitoba, British Columbia, and other provinces began to think about selling their businesses. Suddenly, Loewen found himself flooded with acquisition opportunities primarily consisting of “mom and pop” family-run funeral homes in small communities that preferred to sell their businesses to a large Canadian consolidator.

Incorporated as The Loewen Group, Inc. in October 1985, and encompassing funeral services, real estate, and insurance, the company was operating 45 funeral homes throughout the western provinces of Canada within two years. Loewen had also learned the meaning of economies of scale, and he had centralized the firm’s purchase of such items as embalming fluid, coffins, advertising, and other essential ingredients to the funeral service industry. During the late 1980s, Loewen’s wide range of funeral service offerings, his ability to create economies of scale, and his successful advertising resulted in a phenomenal 65 percent increase in revenue for each funeral service conducted under the auspices of his growing company.

In 1987, The Loewen Group reported earnings of $786,000 on revenues of approximately $14 million. Yet this was not enough capital to expand the company as rapidly as Loewen wished. Consequently, the founder decided to sell 10 percent of the company to the public and, as a result, raised $4.6 million to fund his ever-growing list of acquisitions. As it happened, however, the year reflected a very mediocre performance for the worldwide stock exchanges, diminishing the inflow of capital that Loewen initially had expected. His ability to make acquisitions was curtailed, and, as he experienced unexpected difficulties turning around the acquisitions he had recently made, Loewen arranged a management conference in Vancouver to discuss the direction of the company. At the conference, Loewen asked how many of the former funeral home owners who were now within The Loewen Group had previous experience managing their business within the framework of a budget. Out of a total of 160 former owners, only four people had such experience. Loewen immediately initiated a comprehensive plan to teach each funeral home director the intricate details of balancing a budget. Loewen’s commonsense strategy was that it was much easier to teach a funeral home director how to do accounting than it was to teach an accountant how to treat grieving relatives of the deceased.

Acquisition and Expansion During the Late 1980s

At the beginning of fiscal 1988, The Loewen Group owned and operated 98 funeral homes and five cemeteries. One year later, that number had risen to more than 120 funeral homes and ten cemeteries. The focus of Ray Loewen’s acquisition strategy during these years, a strategy that has remained relatively unchanged, was his concentration on small, family-operated funeral homes and cemeteries. Loewen’s modus operandi was to acquire a funeral home or cemetery, keep the existing management in place, retain the name of the acquired funeral home, and provide funeral directors with generous stock options in the company.

Loewen’s unique strategy of “regional partners” also proved highly successful. Regional partners were the leading operators of acquired businesses who were allowed to strike a formal affiliation with The Loewen Group and were permitted to retain an interest of approximately 10 percent in the future appreciation of the company’s entire regional operation. This arrangement gave the regional partner the ability to benefit from The Loewen Group’s financial support, while the parent company benefited from the regional partner’s involvement in the local community and ability to identify potential candidates for acquisition. Loewen’s “regional partner” strategy worked so well that within two years nearly 30 percent of all company acquisitions of family-run funeral homes had been identified by regional partners.

The Loewen Group was also able to take advantage of the stability of what had come to be called the “death care provider” industry. From 1983 onward, demographic statistics showed that not less than two million people in North America would die each year. As baby boom survivors reached the age of 65, it was projected that the annual death rate would surpass three million. Thus, regardless of economic conditions, the death rate assured the industry of a regular customer base. By continuing its strategic acquisition policy of “mom and pop” family funeral homes and capitalizing on the gradual rise in death rates across North America, by the beginning of 1990 the company had acquired almost 300 funeral homes and approximately 25 cemeteries.

Company Perspectives:

The Loewen Group is committed to surpassing the expectations of the families we serve. Our dedicated men and women strive daily to provide extraordinary service and compassionate care to families during their time of great need.

By focusing on how we manage all aspects of the company and by investing in our employee teams through better training and new systems of accountability, we will provide families with even better service and care.

Growth During the 1990s

In April 1991, to accommodate the growth of the company and the expansion of its administrative offices, The Loewen Group moved its headquarters to a large, three-story building in Burnaby, British Columbia. Always cognizant of the welfare of its employees, during this period the company established an employee share ownership program for both full-time and eligible part-time employees. By the end of fiscal 1993, The Loewen Group had acquired an additional 83 funeral homes and 33 cemeteries; by the end of fiscal 1994, the company had acquired another 108 funeral homes and 46 cemeteries. The total number of funeral homes and cemeteries owned by The Loewen Group on September 18, 1995 was 764 and 172, respectively, an astounding sixfold increase since 1989.

Along with this phenomenal period of acquisition and expansion, however, came an event that threatened the very existence of the company. The Loewen Group, in the course of its expansion strategy, acquired several local funeral homes in the immediate area of Biloxi, Mississippi. Valued at a cost of $8.5 million, two of the funeral homes belonged to Jerry O’Keefe, a former mayor of the city of Biloxi. The purchase ended O’Keefe’s exclusive arrangement to sell his own insurance in the funeral homes that The Loewen Group had purchased. Therefore, O’Keefe decided to sue The Loewen Group for the right to sell his own insurance. Rather than litigate over what management at The Loewen Group regarded as a minor issue, the company agreed to combine funeral-insurance operations in the funeral homes purchased from O’Keefe.

When The Loewen Group backed out of the agreement, O’Keefe returned to court and sued the company for fraud and antitrust violations. O’Keefe had hired an extremely enterprising lawyer who convinced the local jury to award his client between $100 million and $400 million in compensatory and punitive damages. These amounts would have wiped out the net worth of The Loewen Group, and the company decided to appeal the verdict. To make matters worse, however, the Mississippi judge ruled that The Loewen Group would have to post 125 percent of the award within one week, a total of $625 million, if the company wished to continue with the appeal. Company management was understandably stunned. They considered a range of alternatives, from borrowing the money for the bond to declaring bankruptcy under Chapter 11. At the 11th hour, after endless meetings and sleepless nights, management at the company’s headquarters in Burnaby, British Columbia, finally agreed to settle out of court for $240 million.

Although the company’s stock fell from a high of $41 per share to an all-time low of $8 during the litigation, Ray Loewen was determined not to let this episode prevent him from forging ahead. In early 1995, Loewen acquired the Osiris Holding Company for $103.8 million. Located in Philadelphia, Pennsylvania, Osiris owned and operated 22 cemeteries and four combination funeral home/cemetery facilities, all within the United States. In August 1995, the company purchased MHI Group, Inc., an operator of 13 funeral homes, four cemeteries, and three crematories in the state of Rorida, and five additional properties in Colorado. One of the most significant properties involved in this transaction was the Star of David funeral home/cemetery facility that served a large Jewish community in Fort Lauderdale, Florida. During late 1995 and early 1996, the company concluded two more major acquisitions, including the Shipper Group and Ourso Investment Corporation. Shipper Group owned and operated a total of seven cemeteries in the New York/New Jersey area, including Beth Israel Cemetery in Woodbridge, New Jersey. Beth Israel Cemetery was the largest cemetery serving the Jewish community in the state of New Jersey. Ourso Investment Corporation, located in Louisiana, was the owner of 15 funeral homes, two cemeteries, and a growing life insurance business. The Loewen Group expected high returns from Ourso, which had annual revenues of more than $70 million, within a very short time.

In addition to aggressive expansion of its network of funeral homes and cemeteries in North America, in the early 1990s the company established The Loewen Children’s Foundation, a nonprofit organization formed to promote and support hospice care for terminally ill children in both Canada and the United States. The company was also a founding sponsor of Canuck Place, the first freestanding hospice facility to care for terminally ill children and the needs of their families in North America.

The Loewen Group became the second largest provider of death care services in North America, ranked along with the leader in the industry, Service Corporation International, and third place Stewart Enterprises. These three companies, however, represented less than 8 percent of the industry’s total properties and less than 15 percent of its total revenues. With more than 85 percent of the funeral homes within the United States still family-owned or under private ownership in the mid-1990s, The Loewen Group felt confident that there would be ample opportunity to continue its growth through acquisition strategy.

Key Dates:

1961:: A.T. Loewen opens funeral home in Steinbach, Manitoba.
1985:: Ray Loewen forms Loewen Group, Inc.
1991:: Loewen Group moves headquarters to Burnaby, British Columbia.
1996:: Loewen Group settles lawsuit with Jerry O’Keefe, a Mississippi funeral home operator; Loewen acquires Prime Succession Inc., the largest private funeral home business in North America, for $295 million.
1999:: Loewen Group files for Chapter 11 bankruptcy protection in June.
2000:: Company announces plans to shift its headquarters to Toronto.

Assessing the Damage: The Late 1990s

With the potentially disastrous O’Keefe lawsuit behind it, the Loewen Group was determined to pursue an aggressive acquisition strategy in order to boost profitability. The two most substantial deals were done in conjunction with the New-York-based Blackstone Group. The first acquisition was for Prime Succession Inc. of Chicago, the largest private funeral home operator in North America, for $295 million. Under the terms of the agreement, Loewen would own a 20 percent stake in Prime Succession until the year 2000, when it would have the option to purchase the remaining 80 percent from Blackstone. Ultimately, the merger would give Loewen an additional 146 funeral homes and 16 cemeteries in the United States. Loewen entered into a similar agreement with Blackstone in the buyout of the Rose Hills Memorial Park Association of Los Angeles for $240 million. While such partnerships were unusual for the Loewen Group, the two agreements pushed the total value of the company’s acquisitions for 1996 over the $1.4 billion mark, a clear indication that Ray Loewen was intent on expansion.

In the midst of this buying spree came an unexpected—and uninvited—buyout bid from Loewen’s much larger American rival, Service Corporation International. The terms of the offer were very generous: $2.1 billion, in addition to the assumption of $1.1 billion of Loewen’s debt. However, Ray Loewen, who owned a 15 percent stake in the company, valued Loewen’s independence above all else, and he urged board members and shareholders to reject the deal. Service Corporation subsequently raised its bid to $3.24 billion. This second offer amounted to $59 a share, significantly higher than Loewen’s stock value of approximately $40 per share. Ray Loewen, however, managed to persuade the shareholders that his ambitious acquisition plan would, in the long-term, provide a much higher return on their investment, and once again Service Corp. was rebuffed. In January 1997 Service Corp. officially withdrew its bid, and Loewen was free once again to pursue its independent vision.

Unfortunately, the decision to decline Service Corp.’s offer almost precipitated the untimely death of the Loewen Group. Although profits for 1996 were a respectable $63.6 million, investor confidence in the company was still shaken by the O’Keefe settlement, and the shareholders were beginning to become impatient with the company’s sagging share value. Loewen attempted a major restructuring in September 1997, cutting 540 jobs and closing a number of its less lucrative units, in an effort to reduce operating expenses by $25 million a year.

However, a series of quarterly losses forced stock prices to fall steadily over the course of 1997 and 1998, and by January 1999 shares had dropped to $5.65, a steep decline from their $40 value only a year earlier.

This downward spiral proved too much for the founder and CEO, and in October 1998 Ray Loewen stepped down as head of the company. While a merger now seemed like a good idea, interest in the company was no longer as strong as it had been, and by March 1999 the company’s creditors were pounding on the doors. After suffering a 77 percent drop in profits for the first quarter of 1999, the company was forced to file for protection in U.S. Bankruptcy Court in June, in an effort to restructure its debt and try to stay afloat. This it did, and losses for 2000 were reduced to $72.5 million, compared to $465.2 million in 1999. After relocating to Toronto and selling off over 300 holdings, the company submitted an updated filing in March 2001, and seemed to have some chance of survival.