Report could sound death knell for deal
Shareholders won’t vote on the planned second tranche investment by Berkshire Hathaway into Home Capital Group Inc. until a special meeting scheduled for Sept. 12, but it’s possible that the death knell for deal has already sounded.
On Wednesday, Institutional Shareholders Services, one of the two leading proxy advisory firms, released a 14- page report recommending shareholders reject Home Capital’s plan to issue Warren Buffett’s firm an additional 24 million shares at $10.30 per share.
“On a cost- benefit analysis, the proposed Berkshire second tranche appears to offer nominal additional reputational and strategic benefits to those already established under the Berkshire first tranche, while dilution cost of the discounted second tranche is substantial,” noted the report. The report added Home Capital’s “operating results and its financial strength do not point to substantial threats to a stand-alone option.”
Dave Taylor of Taylor Asset Management, whose clients own about 4 per cent of Home Capital, said he hasn’t been able to find a shareholder who supports the second equity tranche.
“Before the ISS report came out, I thought it had a chance of passing, but this seals the deal,” he said.
The ISS report probably didn’t make much of a birthday present for Buffett, whose initial investment consisted of a $ 153 million private placement of equity at $9.55 a share, and a $2 billion line of credit. But the legendary investor, who turned 87 Wednesday, didn’t seem too concerned. In an interview with Bloomberg Television, he was quoted as saying: “We knew it’d be subject to the vote of the shareholders and if the shareholders vote it, we buy it, and if the shareholders don’t vote it we don’t buy it. We knew that could go either way.”
And given his investment philosophy — buy low and let it rise to intrinsic value — there’s probably little chance he will soon sell any of the 16 million shares his firm acquired in the first tranche, which was permitted without a vote under the TSX’s finan- cial hardship rules.
The Berkshire investment did wonders to restore investor confidence to Home Capital, which over the spring, faced a liquidity crisis because of a series of regulatory, financial and legal hurdles, along with senior executive changes.
“The substantial confidence restoration efforts undertaken by the company and completion of other critical steps to regain stability of the business would question the additional benefits that the proposed second tranche of the Berkshire equity investment has to offer,” noted a key part of ISS’s report. Elsewhere in the report, ISS said the “combined impact of the changes and efforts made (by Home Capital) to resolve the outstanding issues appear to provide alternative and less dilutive solutions to the second tranche of the equity investment.”
ISS’s report was delivered about a week after Glass Lewis, another proxy advisory firm, reached a different conclusion. In a five-page report, Glass Lewis said it “generally believes” decisions regarding a company’s business operations, including financings, “are best left to the judgment of the board, absent a showing of egregious conduct or self-dealing that might threaten shareholder value.”
As for evaluating a private placement, Glass Lewis said given Home Capital’s intended use of the proceeds, “which we consider reasonable, we are inclined to support the terms of the placement.” The advisory firm noted the additional capital provided by the private placement “will provide the Company with sufficient flexibility to pursue its strategy, which we believe is in the best interests of shareholders.”
Messages to Turtle Creek, which was Home Capital’s largest shareholder before Buffett came on the scene, weren’t returned. In a statement, Home Capital, whose shares closed Wednesday at $ 13.36, stressed its support for the second tranche, which it argued “was agreed to as part of a larger transaction” and would “further establish Berkshire as a Cornerstone investor.”