Death has been good to Vancouver-based Loewen Group Inc.
The Canadian company, North America's second-largest funeral home and cemetery business, has been on a shopping spree. Last year, it signed or closed about 150 acquisitions, totaling more than $1.4 billion.
Loewen now owns and operates close to 1,000 funeral homes and more than 300 cemeteries in the United States and Canada. Ninety percent of its revenue is derived from its U.S. business.
After helping fend off a recent hostile takeover bid by Service Corporation International, Paul Wagler, Loewen's chief financial officer and senior vice president for finance, talked with American Banker about his company's commercial and investment banking relationships and the competitive banking landscape.
With all the hype surrounding the convergence of commercial and investment banking, what real differences do you still see between the two?
WAGLER: There are pluses and minuses in having them both in the same house. The best example, on a positive side, is Goldman Sachs' entree into (commercial) banking. I think they're making an excellent start in that area. They were able to attract a class of investors to several deals we did last year - mutual funds doing prime-type loans - that none of our other bankers had suggested. The crossover was actually to our great benefit.
What's the downside?
WAGLER: Looking back historically, the downside is having just one dominant investment bank and just one dominant commercial bank. That's the main hazard, but we haven't been in that situation for years.
How has increasing competition among lenders affected your company?
WAGLER: The tide has been toward greater efficiency and therefore better pricing, more flexibility, and better-trained people. The people who are working in the business today are a lot better trained than they were 20 years ago.
What financial instruments does Loewen prefer?
WAGLER: Straight bank credit, fairly conventional public debt issues, going out with common stock. Occasionally, we've done things with more of a hybrid nature, but we use a lot of pretty straightforward instruments. We're not people who like complexity just for its own sake. It has to add some easily seen value for us to go into more complicated structures.
How much flexibility do you have on covenants for a syndicated credit?:
WAGLER: Generally speaking, we work toward simplicity in every area, so a few basic covenants are not a problem. Where things get cumbersome is where one bank wants to have its unique covenant, and it's one of 25 players in a syndicate. That can very often mean it can't participate.
What has caused Loewen to terminate banking relationships in the past?
WAGLER: Mostly lack of support and flexibility. There's a tendency, when things are going well, to be very creative and innovative and offer you almost more credit at lower prices than you can imagine. But the moment anything raises a red flag, there's a 180-degree reversal.
Our greatest quality in banking relationships is consistency - people who continue to see the big picture in good times and bad. After we lost a lawsuit that cost us $85 million last year, Bank of Montreal came in to underwrite a $750 million facility. That was a great indication of a consistent style.
What is Loewen's biggest challenge in its relationships with commercial and investment banks?
WAGLER: Keeping them all informed. When you do business with as many banks as we do, each one of them wants good attention, quick response, and good information. We think we're now in a position to do that even better, because we've hired a new director of banking to keep track of all the different banks and relationships.
Is there anything you want from your banks that you haven't been able to get?
WAGLER: We have had some difficulty, due to U.S. law, in finding adequate trust services. We have a lot of trust funds in most of the 50 states. Finding one bank that offers trust and custody services in 50 states has been surprisingly difficult.
Why did you choose Smith Barney as your M&A adviser?:
WAGLER: They have put a lot of firepower onto our account, which counts for a great deal with a company like ours. When you have a particular problem and they send out six or eight of the best people in the business with carefully thought-out solutions, that's very impressive. Other people send out one or two people who just ask questions. It's a qualitative difference that everybody in our firm has been able to appreciate.
Do you look for M&A deals on your own or wait until your bankers bring them to you?
WAGLER: In this particular industry, only the top two or three acquisitions a year - and we make a hundred a year - would draw the attention of investment banks. All the others are $3 million to $25 million deals that investment bankers are not attracted to. We have used advisers for the larger deals, but typically, not to find (deals) for us, but to advise us in the structuring. The smaller ones we just do on our own.
Is there anything you would like to tell bankers directly?
WAGLER: On the investment banking side, we're very interested in people with research capabilities. That's the door to doing investment-type business with Loewen - doing solid research and being prepared to dedicate research analysts to our story. There are not too many companies like ours.
Often people come in and want to do an underwriting tomorrow, without having done any research yesterday. Everybody says they can do it cheaper, quicker, and better, but there are very few companies that are prepared to something major with somebody when they haven't built up to it with some other steps beforehand. Establishing research coverage is not the only possible way of getting in the door, but it's a very pivotal one. Being a specialist is another, like Goldman is in the banking area. They offered us something that the rest of the market didn't.