In June, Buffett’s Berkshire Hathaway Inc. agreed to acquire $400-million of Home Capital’s shares at a steep discount from where the stock was trading.LUCAS JACKSON/Reuters
One investor in Home Capital Group Inc. is doubling down on his opposition of Warren Buffett's bid to increase his stake in the company.
In June, Mr. Buffett's Berkshire Hathaway Inc. agreed to acquire $400-million of Home Capital's shares at a steep discount from where the stock was trading. The deal was to be completed in two transactions. The first for $153-million gave Berkshire a stake of nearly 20 per cent in the company. But its second proposed share purchase, which would see Berkshire's position grow to 38 per cent, requires shareholder approval.
David Taylor, founder of Toronto's Taylor Asset Management, wasn't a fan of Berkshire's second share purchase from the start. The firm, which owns about 3.5 per cent of Home Capital's shares, still intends to vote against it at a special meeting on Sept. 12. An influential proxy advisory firm agrees with Mr. Taylor and is telling investors to say no to more of Mr. Buffett.
Mr. Taylor says Home Capital doesn't need the money. Before Mr. Buffett came to the rescue in June, Home Capital was on the brink of financial collapse. But the company withstood a surge of withdrawals and in recent weeks, it has rebuilt its deposit base by attracting net inflows into its guaranteed investment certificates (GICs) and savings accounts.
"We didn't like the second tranche from day one," he said. "In fact, we didn't like it then but we like it even less now because we didn't think that GIC sales would be as strong as they are. They are much stronger than we thought on the back of Buffett."
Deposit inflows have returned to historical levels, Home Capital said in early August. Its GIC deposits have increased to $12.48-billion on Aug. 1, rising from $12.15-billion on June 29. Savings accounts under the Home Trust and Oaken Financial brands have also grown.
To draw funds in the midst of the crisis, Home Capital hiked its interest rates. In late May, a one-year Home Trust GIC offered 2.2 per cent, whereas a one-year Oaken GIC offered 2.6 per cent. But Home Capital has since lowered its rates. Today, these products offer depositors interest rates of 1.5 and 2.5 per cent, respectively.
Mr. Taylor says this move by Home Capital is a sign of confidence it has in its cash position.
"The reason you want Buffett at 40 per cent is because you need more GIC flows," he said. "If you desperately needed Buffett, you wouldn't be lowering rates."
Mr. Buffett knew from the start that his wave of investment wasn't a slam dunk.
"We hope the shareholders vote yes, but if they vote no, you know, we'll be going ahead with everything we promised to do," Mr. Buffett told The Globe and Mail in June.
Prominent proxy firms are split on the vote. Institutional Shareholder Services Inc. says shareholders should vote against it, adding that the proposed share purchase offers only nominal benefits and will significantly dilute existing shareholders. Glass Lewis & Co. is in favour of more Buffett, saying that financing decisions are best left to the judgment of a company's board – and Home Capital's directors support the deal.
Mr. Taylor says he told Home Capital this week that even though his firm will oppose the second share purchase, he still stands behind the board.
"A vote against the Buffett deal isn't a vote against the board," he said. "We couldn't be more happy with how the board operated and managed to strike this deal. We thought it was a great deal and it saved the company."