HOME CAPITAL SHAREHOLDERS BICKER OVER BUFFETT.

Rick Durst is a veteran investor and a strong believer in shareholders’ rights, and who has, at times, turned activist. He has also been a shareholder of Home Capital Group Inc. for more than two decades.

For most of that time his investment paid off handsomely as Home Capital, the alternative mortgage lender, generated stellar returns. The ride up — the shares hit an all time high of $ 55.75 about three years back — was more enjoyable than the slide. In May the shares hit $ 5.85 — or a drop of almost 90 per cent from the peak, just before the Warren Buffett- led Berkshire Hathaway Inc. stepped in to purchase a potential 38.39 per cent of the company in a two- tranche process. Buffett picked up a 19.99 per cent stake in the company for $153.2 million in the first tranche.

Home Capital’s shares closed Tuesday at $13.01.

But Durst, whose total cost on the shares is below the current trading price, won’t be supporting Berkshire’s second tranche, which requires a shareholder vote. The company plans to issue 23.955 million common shares to Berkshire, which would hand over more than a third of the company to the Oracle of Omaha.

“It’s highly dilutive, will significantly reduce return on equity and will significantly extend the time for existing shareholders to recover their lost hard- earned equity,” he said. Home Capital plans to issue shares at $ 10.30 a share — which is not only below net asset value at the current share price, but also considerably below the trading price of the shares the day the first placement to Berkshire was announced on June 21, when it was trading at $ 14.94. Berkshire paid $9.55 a share for its initial 19.99- per- cent investment, a stake acquired under the TSX financial hardship rules that did not require shareholder approval.

If approved at a special meeting on Sept. 12 (a simple majority is required, with Berkshire ineligible to vote) the Omaha- based company will become Home Capital’s l argest shareholder, acquired for about $ 400 million.

Berkshire also provided a $ 2- billion line of credit on less- onerous terms than what Home Capital paid for a similar facility from The Healthcare of Ontario Pension Plan, or HOOPP. About one month after accepting the Berkshire facility, Home Capital r epaid t he f ull amount.

“They don’t need the capital in the second tranche,” said Durst, given that it just paid $2 billion back to Berkshire. “Why are they issuing more shares to dilute the much beaten- up shareholders?” asks Durst, noting that Home Capital’s directors and executive own 90,221 common shares, a collective stake worth less than $1.2 million.

In what may be a precedent-setting number of advisers, Home Capital retained three firms — Blair Franklin, BMO Capital Markets and RBC Capital Markets — for a fairness opinion. By incorporating a number of assumptions, the three essentially compared Home Capital’s implied share price with and without the Berkshire investment.

Home Capital said the board, “after consultation with its legal and financial advisers, unanimously determined that the transaction with Berkshire ( i ncluding the Berkshire Second Tranche) is in the best interests of the corporation,” and urged shareholders to support the plan.

So what happens if shareholders do not approve Berkshire Hathaway’s second tranche? Durst argues Home Capital’s stock price “will recover more than it otherwise would,” noting that when Berkshire rode to the rescue and beat out competing offers from two Canadian private equity firms, “Home Capital got a lot of credibility. It may get a little more credibility, but they are facing huge dilution,” he stated.

As with many other shareholders, Durst wonders why Home Capital’s share price has been on a steady slide since the Berkshire announcement was made.

Calls to two institutional shareholders — Turtle Creek Asset Management ( listed in the circular as owning 14.249 million shares, with a 17.76- per- cent stake) and Taylor Asset Management — seeking comment on their voting intentions were not returned.

THEY DON’T NEED THE CAPITAL IN THE SECOND TRANCHE.