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If HOMEQ sale fails, say goodbye to dividend

Reverse-mortgage provider HOMEQ Corp.'s decision to sell to a private equity fund isn't popular with all shareholders, but the alternative is likely to be unpalatable to many, too.

HOMEQ has agreed to a $9.50 a share takeover bid from private equity firm Birch Hill Equity Partners. The planned $138-million sale drew the ire of HOMEQ's largest shareholder, Maxam Capital, which said the price was too low and questioned the decision to sell now. Maxam plans to vote against the deal.

In a new filing, HOMEQ said the company's dividend is likely doomed if the sale is not consummated. HOMEQ also said that there's not a lot of interest from other buyers in paying anything close to what Birch Hill is offering.

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Those statements may sway a lot of shareholders to vote for the takeover. The dividend, at current share prices, provides a yield of about 3 per cent, and helps to put a floor under the stock.

"Management will recommend to the board of directors that HOMEQ's dividend on the common shares not be reinstated, whether or not the arrangement is completed, in order to partially address the need for additional capital required to achieve HOMEQ's future growth plans," the company said.

The company said that it decided to look for a buyer because it would not have enough capital on its own to meet capital ratios demanded by regulators while still growing the business, and few options to meet the demands while remaining public. The likely answer was a combination of ending the regular payouts to shareholders and trying to raise new equity. But that could be a toxic mix. Eliminating the dividend would drive the stock down, making an issue of shares to raise capital more punishing for existing shareholders, the board worried.

And all along, the company knew it had a potential buyer. Birch Hill had approached HOMEQ in late 2010 about a takeover, saying it would consider paying $9 to $9.50. The company had rebuffed Birch Hill, which persisted. By late 2011, with the capital pinch looming, the company decided to look into a sale.

The company's bankers at RBC Dominion Securities contacted 10 potential buyers, and got two nibbles. Only Birch Hill made a final offer, of $9. That February offer was at the low end of what Birch Hill had previously indicated, "mainly as a result of Birch Hill's reduced expectations for net interest margins going forward and its concern over the degree of over-valuation in the Canadian housing market."

HOMEQ set its bankers to work on convincing Birch Hill that the company was worth more.

By early March, Birch Hill's offer was up to $9.25. A few days later, HOMEQ squeezed another 25 cents out of Birch Hill by promising to cancel its quarterly dividend after the most recent one was paid, and the deal was struck.

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