Billionaire financier Stephen Smith has reached a deal to acquire Home Capital Group Inc. HCG-T that values the alternative mortgage lender at $1.7-billion, placing a major bet on the resilience of Canada’s housing market even with interest rates soaring.
The cash offer of $44 per share would see a subsidiary of Smith Financial Corp., a company Mr. Smith controls that already owns 9.1 per cent of Home Capital, acquire all the remaining shares. The offer represents a 63-per-cent premium to the mortgage lender’s closing stock price last Friday and a 72-per-cent premium to its 20-day average trading price.
There could yet be competition from rival bidders, however. The agreement includes a “go-shop period” until Dec. 30 during which Home Capital and its financial advisers can solicit bids and enter into negotiations with other potential buyers. If Home Capital terminates the agreement with Smith Financial to accept a better offer, it would pay a $25-million termination fee within that period, or $50-million after the “go-shop” window expires.
Since Home Capital suffered a near-collapse in 2017 and was rescued in part by legendary investor Warren Buffett, the company has rebuilt its status as Canada’s leading provider of alternative, or “Alt-A,” mortgages. Those are loans offered at modestly higher rates to borrowers who struggle to qualify at a major bank, often because they have mildly bruised credit, are self-employed or newly arrived in Canada.
But over the past year, Home Capital’s share price had tumbled 39 per cent, closing at $27.05 last Friday, as rapidly rising interest rates and concerns about housing affordability as well as high household debt levels weighed on the mortgage market. That created an opportunity for Mr. Smith to acquire Home Capital at an attractive price. But it means he is buying at a fraught moment for the market, when risks to alternative lenders are higher.
“Yes, there are headwinds,” Mr. Smith said in an interview. “But the headwinds provide the opportunity then to acquire assets.”
In Mr. Smith’s view, the main barometer for the health of the mortgage market is employment, and Canada’s unemployment rate is near its lowest levels in decades. Demand for housing is also expected to stay strong, with a persistent shortage of supply compounded by the federal government’s plans to welcome 500,000 new immigrants per year by 2025.
“I feel very comfortable that there’s a lot of steam left in the Canadian labour market,” Mr. Smith said.
Home Capital’s shares shot up 57 per cent to $42.50 on the Toronto Stock Exchange on Monday.
The acquisition would add to Mr. Smith’s already formidable stake in Canada’s mortgage industry. He is executive chairman and co-founder of First National Financial Corp., a prominent non-bank lender, and chairman of Canada Guaranty Mortgage Insurance Co., one of the country’s largest private mortgage insurers.
He is also the largest shareholder in Equitable Bank, the main competitor to Home Capital in “Alt-A” mortgages. And he is chairman and co-owner of Fairstone Bank of Canada, formerly Walmart Bank Canada, a leader in subprime mortgages.
Mr. Smith said he plans to keep Home Capital as a stand-alone company . “Part of the attraction was [Home Capital chief executive officer Yousry Bissada] and his great management team,” he said.
He also brushed off the notion his acquisition could raise concentration or competition concerns that would cause Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), to hesitate to approve the deal.
“There’s substantial competition in the market” from major banks that dominate mortgage lending at prime rates, credit unions and private mortgage lenders, Mr. Smith said. “I’ve got a lot of advice on this and I’m fairly comfortable. I’m well-known to OSFI. I’m chairman of a couple of regulated entities already. ... So I don’t see any issues in that regard.”
Home Capital’s board “concluded that the transaction is in the best interests of the Company and fair, from a financial point of view, to shareholders,” chair Alan Hibben said in a statement.
Home Capital’s executives and directors were not available for interviews.
Three months ago, Home Capital disclosed it had rejected an unsolicited takeover offer from an unnamed bidder.
When that rejected offer was made, Home Capital had a substantial issuer bid in the market to repurchase as much as $115-million of its shares, or 11.4 per cent. In September, shareholders ultimately tendered only about 1.5 million shares, or 3.9 per cent, at $28.60 each
Neither Mr. Smith nor a Home Capital spokesperson would comment on whether shareholders who tendered shares would take issue with the process.
The transaction is expected to close in mid-2023, but if it closes on or after May 20, the purchase price goes up daily, raising the cost by about 25 cents per share for every three months of delay.
The deal needs approval from two-thirds of Home Capital shareholders at a special meeting, and is subject to further approvals from courts and regulators.
Analysts see a higher bid from a rival as unlikely, and regulators are expected to see Mr. Smith “as a highly sophisticated buyer,” Phil Hardie, an analyst at Scotia Capital Inc., said in a note to clients.