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Jun 22, 2017

Home Capital ‘dropped their pants’ to get Buffett deal done: Money manager

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At least one Bay Street money manager thinks Home Capital Group (HCG.TO) is paying a steep price to bask in the reflected glory of the Oracle of Omaha. In an interview on BNN, First Avenue Advisory Senior Vice President Kash Pashootan said the embattled lender’s highly dilutive, discounted deal with a subsidiary of Warren Buffett’s Berkshire Hathaway (BRKb.N) comes at a steep cost.

“In a best case scenario, Home Capital has a serious credibility issue. So what they’re doing in this deal is acquiring credibility, because who has more credibility than Warren Buffett?” he said. “Great deal for Warren Buffett; Home Capital [is] paying a serious price for credibility.”

The deal will see Buffett take a nearly 40 per cent stake in the embattled mortgage lender in a pair of tranches, paying an average price of $10 per share between the two transactions. Home Capital closed at $14.94 on the TSX Wednesday. Pashootan said the discount should serve as a warning to existing shareholders.

“Warren Buffett does not like Home Capital at $15, which is what the shareholders own it at today. He likes it at $10,” Pashootan said. “Getting in at 10, if it went up to 15, he could sell his stock and cash in a 50 per cent return and shareholders today are sitting there with exactly the same gain or loss they have at this moment.”

Home Capital is seeking TSX approval to forego a shareholder vote on the first tranche of investment, but says it will put the second instalment to a vote in hopes of closing the transaction in September. Pashootan said it’s entirely possible shareholders will reject the second tranche when given the opportunity.

Ultimately, Home Capital said the deal with Buffett was the best one on the table, but Pashootan said markets should take a clear-eyed view and treat this as if it was any major activist investor.

“To me, this is no different than [a Bill] Ackman or some of these activists coming in,” Pashootan said, going on to point out Buffett’s Berkshire will not appoint a director to Home Capital’s board. “In fact, I think it’s worse, because Buffett's experience and expertise will not be involved, from what we know so far, in turning the company around."

"Home Capital dropped their pants on this deal to get it done, given the spread of where the stock is trading at currently, or as of the close yesterday, and what price Buffett is buying in at."