Warren Buffett Suffers Rare Rejection
Gee they are an ungrateful lot in Canada - after saving Home Capital Group, the country’s biggest subprime lender, shareholders have rejected Warren Buffett’s attempt to lift his stake in the still wobbly mortgage group.
In fact shareholders in Home Capital overwhelmingly rejected Buffett’s bid at a meeting on Tuesday, meaning the company, whose finances have settled down since a near death experience in April, will now have to find a way of remaining in business without additional support from Buffett and his Berkshire Hathaway group of companies.
Almost 89% of Home shareholders voted Tuesday to reject a proposal that would have allowed Berkshire to almost double its stake in Home Capital to 38.4%.
It is the third rebuff this year for Buffett. Earlier in the year he linked with Kraft Heinz in the badly planned bid for Unilever that saw him and his partners retreat with some shame (leading him to again swear off hostile takeovers), then last month, Berkshire and Buffett lost out in their $US18 billion bid for Texan energy utility Oncor. ($US9 billion in cash and takeover debt of the same figure)
Berkshire was overbid by a combination of a Sempra, a San Diego power group, and Elliott Management, the New York hedge fund that is making life tough for BHP Billiton. Buefftt refused to lift its offer.
When Berkshire Hathaway agreed to acquire $C400-million of Home Capital’s shares at discounted prices, the deal was structured in two parts. The first, for $C153-million or $9.55 a share, gave Berkshire an almost 19.9% stake. Berkshire also gave Home Capital a $C2-billion standby credit line, which generates fees and interest income for Berkshire.
As in other deals where he has done this (Goldman Sachs, Bank of America and General Electric in the GFC) Mr. Buffett’s name has helped reassure Home depositors and other customers and give them greater confidence in the company. Since his initial investment in June, the flow of money into its guaranteed investment certificates has reversed from a drain to inflow and the company is now lowering the generous interest rates that were used to attract deposits.
With Berkshire now prevented from entrenching its position as a cornerstone investor, Home Capital must now rely on the stability of its own funding sources to begin rebuilding its diminished mortgage business.
The shareholder vote defied support for the Buffett deal from Home Capital’s own board. The board had unanimously recommended deal, arguing it would validate Mr. Buffett's backing, enhance Home Capital's stature in capital and deposit markets and provide extra liquidity.
The provisional second tranche of shares, negotiated as part of the original deal, would have cost Mr. Buffett only $C10.30 a share – a 28% discount to Home Capital’s share price of $C14.35 at Tuesday’s close on the Toronto Stock Exchange. That share price through is still much less than the $C19 the shares soared to when Buffett’s bail out was announced. But it is a long way above the low of $C5.99 hit in late April as the company went close to collapse.
Some Canadian investment analysts expect Berkshire to stay a shareholder for the time being, but wouldn’t surprise if it quits its stake one it is confident Home will not face collapse for a second time.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.