National Post (National Edition)
Buffett not only winner in HCG deal
The various and many ways in which the TSX influences how transactions are structured has been on full display this past week.
The most recent example occurred Thursday when Home Capital Group Inc. announced it had received an equity infusion from Warren Buffett that could be as much as $400 million — as well as a $2-billion credit facility from the same source.
What was noteworthy about the first equity round — a $153.2-million investment that will purchase 16.044 million shares at $9.55 a share and will be done by way of a private placement — was the steep discount to the prevailing market price. Why such a large discount?
It turns out that the TSX has strict rules on private placements — a transaction it deems as being done “without prospectus disclosure, in reliance on an exemption from the prospectus requirements under applicable securities laws” — and the associated discount.
When an issuer is thinking of using a private placement, it essentially calls the TSX and tells it about its plans and then books a price. That price is always set at a discount to the thenmarket price with the actual discount being a function of the trading price. For a stock trading less than 50 cents, the maximum discount is 25 per cent; for a stock trading between 51 cents and $2 the maximum discount is 20 per cent; and for a stock trading above $2 (such as Home Capital) the maximum is 15 per cent.
That’s the discount the two parties agreed to on June 13, the day Buffet’s firm, Berkshire Hathaway Inc. made its final proposal to Home Capital. In this case, the discount was set relative to the five-day volumeweighted average price.
As things materialized, the discount became ever larger because between the time the final proposal was made and when the deal was announced, Home Capital was busy: settling a series of allegations made by the OSC and a related classaction law suit and announcing asset sales. When news of those developments occurred Home Capital’s share price jumped.
Given that Home Capital is issuing 25 per cent of its shares outstanding to Berkshire, a shareholder vote would normally be required. But Home Capital said it intends to apply to the TSX pursuant to the financial hardship provisions of the TSX Company Manual to apply for an exemption. It would be a brave decision by the TSX not to grant the exemption.
But Berkshire is prepared to make a second equity infusion and will do so if shareholders give the go-ahead. In that potential second investment — if endorsed, it would provide $246.8 million — Home Capital was able to secure a smaller discount.
Specifically, Home Capital is planning to sell shares at $10.30 a piece — an eightper-cent discount to the fiveday volume weighted average price ending June 13.
So who wins from Thursday’s developments?
Clearly Berkshire because of the way the market handled the news that Home Capital has received a major boost from the world’s most renowned investor. The shares jumped 27 per cent to close at $19 — about double what Berkshire agreed to pay for the initial investment.
And Berkshire wins at the expense of other shareholders because their gains aren’t as strong as Berkshire’s.
The company also wins because it has secured, at least, its near-term future. Whether it’s been permanently secured depends on how management performs and how well the company can regain trust and confidence.
According to Bloomberg, at least four analysts are convinced: They all upgraded their recommendation on Thursday.