Home Capital Group Inc. HCG-T is moving closer to being acquired by billionaire financier Stephen Smith after its go-shop period ended without any higher offers.
The alternative mortgage lender reached a deal with a subsidiary of Smith Financial Corp. in November for a $1.7-billion takeover. But the deal also included a six-week go-shop window that allowed Home Capital to solicit offers from other potential buyers.
Home Capital’s financial advisers, BMO Capital Markets and TD Securities, reached out to 38 potential buyers and entered into confidentiality agreements to provide three companies with financial information that was not public. None of those discussions led to bids, however.
The go-shop window ended on Dec. 30. If the lender had terminated its agreement with Smith Financial to accept a higher offer, it would have had to pay a $25-million termination fee within that period, or $50-million after the go-shop period expired.
With no new offers tabled, Home Capital is left with a cash offer of $44 a share from a subsidiary of Smith Financial, which already owns 9.1 per cent of Home Capital.
If Home Capital had received a better offer, Smith Financial would have had the right to match the competing bid – which could have prompted a bidding war. While Mr. Smith would not say whether he was prepared to raise his offer, he said that he did not expect any other companies would submit a bid.
“I’m not surprised,” Mr. Smith said in an interview Tuesday. “The negotiations that we entered into were over a significant period of time. It’s a sophisticated board and they had a good sense that they had extracted a full and fair price.”
Stephen Smith’s contrarian bid for Home Capital shows faith in housing markets
The deal is expected to close in mid-2023, pending approvals from at least two-thirds of Home Capital shareholders at a special meeting, as well as courts and regulators. If it closes on or after May 20, the purchase price rises each day, hiking the cost by about 25 cents a share for every three months of delay.
Mr. Smith’s takeover comes as soaring mortgage rates and slumping home prices weigh on the torrid run of Canada’s housing market. Home Capital has climbed back to its position as a leading provider of alternative mortgages since its near collapse in 2017, when investor Warren Buffett rescued it.
But the company’s share price tumbled early last year as investors braced for aggressive interest rate hikes that could dampen lending in Canada’s hot housing market. In August, Home Capital said it rejected an unsolicited takeover offer from an unnamed bidder.
Even as a recession looms, Mr. Smith said that he has a more optimistic outlook on Canada’s housing sector than most people. The unemployment rate is hovering at historic lows even as the Bank of Canada wages its aggressive campaign against inflation. Employment is a key metric Mr. Smith uses to evaluate the stability of the housing market.
“People tend to correlate the price of housing with the health of the mortgage market,” Mr. Smith said. “But as long as people have jobs, they’ll continue to pay their mortgages. Unemployment and the state of the economy in that sense are very strong.”
Mr. Smith is already a stalwart in Canada’s mortgage industry. He is executive chairman and co-founder of First National Financial Corp., one of the country’s largest non-bank lenders. He is also chairman of prominent private mortgage insurer Canada Guaranty Mortgage Insurance Co., as well as the largest shareholder in Equitable Bank and chairman and co-owner of Fairstone Bank of Canada, formerly Walmart Bank Canada.