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A company controlled by billionaire financier Stephen Smith has reached a deal to acquire alternative mortgage lender Home Capital Group Inc. HCG-T for $44 per share in cash, for a purchase price of nearly $1.7-billion.
The offer from a subsidiary of Smith Financial Corp., which already owns 9.1 per cent of Home Capital, represents a 63-per-cent premium to its latest stock price and a 72-per-cent premium to the average trading price over 20 days up to last Friday.
But the deal isn’t set in stone. 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 rival buyers. If Home Capital terminates the agreement with Smith Financial to accept a better offer within the go-shop period, it will pay a $25-million termination fee. The fee doubles if Home Capital seals an alternative deal more than five days after December 30.
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,” said board chair Alan Hibben, in a prepared statement. “We are pleased to have reached an agreement that provides shareholders with compelling and certain value in the form of an all-cash offer.”
Three months ago, Home Capital disclosed that it had rejected an unsolicited takeover offer from an unnamed bidder. Mr. Smith, who is executive chairman and co-founder of rival mortgage lender First National Financial Corp., was widely thought to have been the most likely bidder at the time.
Home Capital rebuilt its fortunes after a near-collapse in 2017 and has consistently been one of the leading providers of alternative mortgages – those offered to borrowers who struggle to qualify at a major bank, often because they have mildly bruised credit, are self-employed or are newly arrived in Canada. But Home Capital’s share price has tumbled 39 per cent over the last year as soaring interest rates put pressure on the housing market and already stretched home buyers.
The acquisition would add to Mr. Smith’s already significant stake in Canada’s mortgage industry. In addition to leading First National, he is chairman of Canada Guaranty Mortgage Insurance Co., one of the country’s largest private mortgage insurers which he owns in partnership with Ontario Teachers’ Pension Plan. He is also chairman and co-owner of Fairstone Bank of Canada, formerly Walmart Bank Canada, which offers mortgages among other loans and financing products.
“With its talented work force, diversified presence across Canada, trusted positions as a lender and deposit-taker and 36-year operating history, Home Capital is a strategic asset,” Mr. Smith said in a news release. “I look forward to owning another business with a bright future.”
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.
The transaction is expected to close in mid-2023, but if it closes on or after May 20, the purchase price goes up by three-tenths of a cent each day – or about 25 cents per share for each three-month delay.
In the meantime, Home Capital intends to keep paying its quarterly cash dividends.
BMO Nesbitt Burns Inc. and TD Securities Inc. are Home Capital’s financial advisers, and RBC Dominion Securities Inc. is adviser to Smith Financial. Torys LLP acted as legal adviser to Home Capital, and Stikeman Elliott LLP for Smith Financial.
BMO, TD and Deloitte LLP each provided opinions that the transaction is fair.
