Noah Zivitz

Managing Editor, BNN Bloomberg

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Home Capital Group Inc. announced Monday that it has turned down a non-binding buyout approach from an unidentified suitor.

The alternative mortgage lender said the "unsolicited, non-binding, and conditional expression of interest" was made by an "arm's length third party" after Home Capital launched a substantial issuer bid to repurchase up to $115 million of its shares.

While the company didn’t offer specifics about the expression of interest, it said the consideration was all-cash at a price that exceeds the $28.60-per-share cap on its substantial issuer bid. Home Capital added that it would have been forced to withdraw that buyback plan as a condition of the buyout approach.

Jaeme Gloyn, who covers Home Capital Group for National Bank of Canada Financial Markets, said in a report to clients Monday he thinks the company’s shares “will reflect a ‘takeover premium’ in the near term” in light of how it described the value of the expression of interest.

The lender said it brought in advisors from BMO Capital Markets, TD Securities, and Torys LLP to assist with a review of the expression of interest, which the company said came from the same third party that previously worked in concert with another unidentified party on a non-binding takeover proposal that was later abandoned.

Home Capital said in a release it "has no indication as to the third party’s current intentions, including whether it intends to submit an additional proposal or otherwise attempt to acquire the company’s shares."

A spokesperson for the company declined to confirm the identity of the suitor.

Gloyn, who has a sector perform recommendation (the equivalent of a buy) on Home Capital and a price target of $31.00 per share, said he doubts that either of the other mortgage lenders in his coverage universe — First National Financial Corp. and EQB Inc. — are likely to be the party that’s circling Home Capital for a takeover.

Instead, Gloyn speculated that it’s likely a privately-owned strategically-interested party or private equity firm.

He pointed out that Onex Corp. and Brookfield Asset Management Inc. reportedly made an approach to buy Home Capital in 2017 when the company was fighting for its survival amid a run on deposits. It was in June 2017 when Home Capital shocked Bay Street by announcing it lined up Warren Buffett’s Berkshire Hathaway Inc. as a financial backer with a $400-million equity investment and a $2-billion line of credit.

As for a strategic party that might want to buy Home Capital, Gloyn said Fairstone Bank “is an interesting candidate,” in part because it’s already a regulated Schedule I bank and since it’s owned by Canadian mortgage industry veteran Stephen Smith, who previously co-founded First National and served as that company’s executive chairman.