Buffett’s Home Capital bid beat two other suitors

Alternative mortgage lender fielded acquisition offers from two different private equity firms in June — one of which raised its bid even after the Toronto company decided to take Warren Buffett’s white-knight deal, according to a proxy circular released on Friday.

The two firms were not named in the document released ahead of a special meeting of shareholders next month, but sources familiar with the process say Home Capital’s two suitors were Onex Corp. and Brookfield Business Partners.

As the embattled company faced a crisis of confidence earlier this year, Home Capital and its financial and legal advisers liaised with 88 different parties as it explored its options to shore up liquidity, it said in the document.

On June 2, the company received an unsolicited proposal for 100 per cent of the common shares from an unnamed private equity firm, Home Capital’s board said in the circular. Canada’s biggest alternative lender received another proposal to acquire 100 per cent of the common shares from an unnamed private equity firm on June 12, it added.

Even after Home Capital announced its deal with Buffett’s

on June 21 — in which the company would acquire up to 38.39 per cent of Home Capital in two tranches for an average of $10 per share — one private equity firm upped its June 2 offer for the second time on June 23, the circular said, but did not disclose the bid price.

After some consideration, Home Capital’s board rejected the sweetened offer, it said.

“The Board determined that the revised acquisition proposal was inferior to the (Berkshire) Transaction and that the Transaction was in the best interests of the Corporation and continued to provide Shareholders with the best combination of transaction certainty and the potential for enhanced Shareholder value, while meeting the need for strong sponsorship and lower cost standby debt financing,” it said.

Sources familiar with the process say Brookfield Business Partners, established under the Brookfield umbrella last year to acquire and manage businesses in out-offavour sectors, was one of the firms vying for 100 per cent of troubled Home Capital. According to one source, Brookfield was the firm mentioned in the circular that sweetened its bid in June, but ultimately lost out to the investment and loan transaction negotiated with Buffett. Onex Corp. is also understood to have also put in a bid for 100 per cent of the Home Capital shares in a proposed transaction that was ultimately considered inferior to the Buffett arrangement.

These new details about the options Home Capital considered as it was pushed to the brink amid allegations of misleading disclosure and a partial run on its deposits have emerged in a proxy circular as shareholders prepare to vote on whether Buffett should be allowed to buy a bigger piece of the company in a meeting on Sept. 12.

The initial tranche of more than 16 million shares for $153 million or $9.55 per share, which gives Berkshire Hathaway a 19.99-per-cent stake, was completed on June 29 and did not require shareholder approval due to use of a special “financial hardship” provision of the Toronto Stock Exchange. Also, as part of the agreement, Berkshire Hathaway has provided a $2-billion loan facility to Home Capital, secured against a portfolio of mortgages.

The additional option to acquire 23.9 million common shares for about $10.30 per share, however, requires approval by a majority of Home Capital shareholders.

Shareholders were divided on the second tranche in the days after the Berkshire Hathaway announcement, as Home Capital’s stock hit $19 on the day after the Buffett deal was announced. However, shares of the alternative mortgage lender have since retreated to roughly $13 in Toronto on Friday, making an average $10 price more palatable.

In the circular on Friday, Home Capital’s board reiterated its unanimous recommendation to shareholders to vote in favour of Buffett’s additional investment on Sept. 12.

“The Board was required to judge which sponsor would achieve the greatest acceptance by depositors and capital market participants,” it said. “It continues to believe that Berkshire provides the greatest possible reputation, credibility and strength. The Board unanimously determined that the Transaction (including the Berkshire Second Tranche) is, by a considerable margin, the best alternative for restoring confidence and stabilizing the business.”

Other proposals on the table for Home Capital after it retained BMO Capital Markets and RBC Capital Markets in late April to explore its options included a wide range of liquidity support and strategic partnership alternatives, including proposals for the sale or financing of non-core and mortgage assets, the company said in the proxy circular. That also included proposals for stand-alone lending and secured financing facilities led by both Canadian and nonCanadian financial institutions, as well as proposals for investments in convertible preferred shares and debt by an unnamed global asset manager, it added.

On June 20, Home Capital announced it had reached an agreement with KingSett Capital to sell certain commercial mortgage assets valued at approximately $1.2 billion. It announced the completion of the final tranche of that deal on Thursday. Home Capital also sold approximately $249 million of residential mortgages to a third party on June 30, it said in the circular.

Home Capital said in its latest quarterly earnings release earlier this month that the uncertainty that cast significant doubt on the company’s ability going forward has been “resolved.” As well, a new chief executive, Yousry Bissada, took the top job at Home Capital on Aug. 3.