Investor Warren Buffett poses for a portrait during an interview after a luncheon to benefit the Glide Foundation of San Francisco in New York April 23, 2014.LUCAS JACKSON/Reuters
Does Home Capital Group Inc. need any more of Warren Buffett? One major proxy adviser says no.
Institutional Shareholder Services Inc. is urging shareholders of Canada's largest alternative-mortgage lender to vote against a second share purchase by the renowned investor's Berkshire Hathaway Inc. at a meeting on Sept. 12. Investors shouldn't dilute their positions further because more of Berkshire won't offer Home Capital much of a boost, ISS said on Wednesday in a report.
In June, Berkshire made a splash when it agreed to indirectly acquire $400-million of Home Capital's shares at a steep discount from where the stock was trading at the time. The deal, which helped shore up confidence in the Canadian lender as it was bleeding deposits, had to be done in two steps if any of it was going to get done quickly.
Berkshire first bought a stake in Home Capital of nearly 20 per cent, or 16 million shares, at $9.55 each, a 36-per-cent discount to where the stock was trading the day before the agreement was made public. Home Capital relied on a so-called "financial hardship" clause to bypass a shareholder vote on that part of the transaction, giving it $153-million in fresh capital within days.
The first step has already made Berkshire the largest investor in Home Capital, topping Toronto's Turtle Creek Asset Management. The second, bigger proposed share purchase by Berkshire for the rest – about 24 million shares, priced at $10.30 each, below Wednesday's closing price of $13.36 – is what shareholders will vote either for or against at the upcoming meeting.
If they don't approve the purchase, influential proxy firm ISS says it won't be the end of the world for Home Capital, which has stabilized its financial footing and restored a steady flow of new deposits in recent weeks.
The company has sold assets, overhauled its top rank, settled a case with the Ontario Securities Commission, suspended its dividend and repaid a $2-billion line of credit from Berkshire.
If shareholders do approve it, Berkshire would wind up owning 38.4 per cent of the company and Home Capital would get another infusion of cash – although it hasn't said how it would spend the money.
ISS said Berkshire's second transaction offers "nominal additional reputational and strategic benefits" to what Berkshire's initial stake in Home Capital provided. It added that the dilution cost is "substantial."
In a statement, Home Capital spokesman Boyd Erman said a bigger stake from Berkshire would help the company "withstand regulatory, policy and economic changes" and "lead to a stronger commitment from Berkshire to the long-term success of Home Capital."
There seems to be a split among the major proxy firms. Glass Lewis & Co. LLC recommends that shareholders vote in favour of the second transaction. In a report last week, it said that financing decisions are best left to the judgment of a company's board – and Home Capital's directors support the deal.
Although shares of Home Capital rose almost 1 per cent on Wednesday, the stock has been on a wild ride. In April, its shares were trading below $6, after the OSC filed a case against Home Capital alleging a failure to disclose concerns about mortgage fraud. After the Berkshire deal in June, the stock was trading at $19. But since then, its price has declined and it traded sideways in July and through August.
Even though many investors applauded the Berkshire deal, critics of the second share purchase emerged early on.
David Taylor, chief investment officer at Taylor Asset Management Inc., told The Globe and Mail in June that his firm, which owned shares of Home Capital, would oppose the second proposed tranche. "We wouldn't vote for that, no. We're very happy with the first deal for 16 million shares, but we don't need any more than that," he said.
Mr. Buffett also knew his second wave of investment wasn't a slam dunk.
"The board could only sell us the amount of shares they sold us [the first 16 million] without a shareholders' vote, and we essentially acquiesced with that," Mr. Buffett told The Globe in June. "We hope the shareholders vote yes, but if they vote no, you know, we'll be going ahead with everything we promised to do."