Skip to main content

Berkshire Hathaway Chairman and CEO Warren Buffett gestures during an interview in Omaha, Nebraska in this file photo.

Nati Harnik/AP

Shareholders in Home Capital Group Inc. have resoundingly rejected Warren Buffett's bid to boost his stake in the mortgage lender, which must now try to rebuild its fortunes without additional support from its star investor.

Almost 89 per cent of shareholders voted Tuesday to reject a proposal that would have allowed Mr. Buffett's firm, Berkshire Hathaway Inc., to almost double its stake in Home Capital to 38.4 per cent.

Berkshire is already the alternative lender's largest shareholder but was seeking to buy a second tranche of shares at the deeply discounted price of $247-million.

Story continues below advertisement

Exclusive: Buffett on how he struck the Home Capital deal

For subscribers: Home Capital ignored regulator, partner warnings: report

The decision to turn down further investment from Mr. Buffett cost Berkshire an immediate paper profit of about $90-million, as the shares it had planned to buy were already worth $337-million, based on Monday's closing price.

But the vote can be interpreted as a signal that Home Capital's shareholders are feeling better about the company's financial stability. Since Mr. Buffett's initial investment in June, when he struck a deal to buy $153-million in shares at a bargain price, the company has shown signs of progress and has been attracting money from depositors again.

Most shareholders saw no reason to further dilute their own stakes.

Yet, Home Capital still faces an uphill battle as it aims to rebound after surviving a brush with insolvency and a run on its deposits this year.

With Berkshire blocked from solidifying 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.

Story continues below advertisement

"This meeting marks the end of an eventful chapter in the corporation's history," Brenda Eprile, chairwoman of Home Capital's board of directors, told shareholders. "To me, this decision on the second tranche is a clear message that the majority of our shareholders believe that Home Capital's improved deposit in-flows and liquidity position diminish the need for additional capital."

Home Capital has a new chief executive officer, Yousry Bissada, who arrived in early August; a new chief financial officer, Brad Kotush; and a refreshed board of directors. Under their direction, the company is trying to strike a delicate balance: bringing down its funding costs while still attracting the deposits it needs to gradually increase the flow of new loans it underwrites.

But the vote's outcome defied Home Capital's own board, which had agreed to sell Mr. Buffett a second block of shares, subject to a vote. The board unanimously recommended selling the second tranche, arguing it would validate Mr. Buffett's backing, enhance Home Capital's stature in capital and deposit markets and provide extra liquidity.

Neither Ms. Eprile nor Mr. Bissada were available for interviews.

About 50 people attended the subdued, 24-minute meeting in a downtown Toronto convention centre. When the result was announced, one individual shareholder in the room, Harry Houtman, exclaimed: "Wow, great!"

Less than three months earlier, shareholders had reacted with similar relief after Mr. Buffett arrived on the scene of a crisis.

Story continues below advertisement

When Berkshire Hathaway agreed to acquire $400-million of Home Capital's shares at discounted prices, the hastily negotiated deal was structured in two tranches. The first, for $153-million or $9.55 a share, gave Berkshire an almost 20-per-cent stake. Berkshire also collects a fee for providing Home Capital with a $2-billion standby credit line.

Mr. Buffett's name served as a key seal of approval, giving depositors greater confidence in the company. Since his initial investment, the flow of money into its guaranteed investment certificates has returned to more normal levels, and the company is now lowering the generous interest rates that were used to attract deposits.

"This company was in real trouble, and Berkshire stepping in – providing liquidity, making an investment in the stock – arguably saved the business," said Jim Shanahan, an analyst at Edward Jones & Co. who covers Berkshire Hathaway.

The provisional second tranche of shares, negotiated as part of the original deal, would have cost Mr. Buffett only $10.30 a share – a 27-per-cent discount to Home Capital's share price of $14.08 at Monday's close on the Toronto Stock Exchange.

This second investment faced opposition from the start. Some analysts had already priced a no vote into their estimates. And the influential proxy advisory firm Institutional Shareholder Services Inc. recommended that shareholders vote against the deal. (Another firm, Glass Lewis & Co., sided with Home Capital's board.)

Even executives at Berkshire were well aware the second tranche was never a sure bet. In June, Mr. Buffett told The Globe and Mail: "We hope the shareholders vote yes, but if they vote no, you know, we'll be going ahead with everything we promised to do."

Story continues below advertisement

A Berkshire Hathaway executive declined to comment on the vote.

It remains to be seen whether Berkshire's long-term interest in Home Capital could be diminished now that it has a lesser stake in the company's future.

"Since it's small, will they stay with it?" Mr. Shanahan said. "This could be a long, slow recovery in the stock price going forward, and there just may be more attractive opportunities out there for Berkshire at some point."

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter