Proxy firm ISS against Buffett bid to increase stake in Home Capital

Shareholders of Home Capital Group are being advised by leading proxy advisory firm Institutional Shareholder Services to vote against a deal that would see Warren Buffett's Berkshire Hathaway increase its stake in the Toronto-based company.

Berkshire Hathaway could up its indirect stake in Home Capital to 38.4%

Signage is displayed outside the Home Capital Group Inc. headquarters office in Toronto in this May 2017 photo. (Cole Burston/Bloomberg)

Home Capital Group is standing behind Warren Buffett's Berkshire Hathaway bid to increase its stake in the company after leading proxy advisory firm Institutional Shareholder Services advised investors to vote against the deal.

The Toronto-based alternative lender said Wednesday its prospects have improved since the American billionaire's conglomerate announced in June that it would support Home Capital through an initial investment of $153 million for a 19.99 per cent stake in the company and by providing it with a $2 billion line of credit. That investment required only regulatory approval, which it received at the end of June.

Berkshire also agreed to invest a further $246.7 million, at $10.30 per share, which would increase its indirect stake in Home Capital to 38.4 per cent. This round requires shareholder approval in a vote on Sept. 12.

Despite ISS's warning that the proposed second tranche will do little to enhance the already-improved stability of the company, Home Capital says the larger investment will lead to a stronger commitment from Berkshire to the long-term success of the lender.

"This creates strong sponsorship to withstand regulatory, policy and economic changes," Home Capital said in a statement.

"Berkshire's involvement has received favourable press coverage and has generally been well received by our stakeholders, including depositors and borrowers."

Last week, another proxy adviser firm, Glass Lewis endorsed the proposed Berkshire second tranche.

"We believe the additional capital provided by the private placement will provide the company with sufficient flexibility to pursue its strategy, which we believe is in the best interests of shareholders," Glass Lewis wrote in a report to clients.

Buffett's financial lifeline in June provided much-need funding and helped restore investor confidence in Home Capital after the company faced a run on deposits by customers in April following allegations by regulators that it misled investors.

ISS said in a report Tuesday that at the time it was announced, the second round of equity investment from Berkshire seemed the best available alternative for stabilizing Home Capital.

But since then, it added, the company has made substantial progress such as board and management renewal, Ontario Securities Commission and class action settlements, asset sales, dividend suspension, repayment of Berkshire's line of credit, and restoration of deposit inflows to historical averages.

"On a cost-benefit analysis, the proposed Berkshire second tranche appears to offer nominal additional reputational and strategic benefits to those already established under the Berkshire first tranche, while dilution cost of the discounted second tranche is substantial," ISS said in a statement.

"On balance, a vote against the proposed second tranche of the Berkshire equity investment is warranted."

On Tuesday, Home Capital also announced it was continuing to rebuild its executive ranks with the hiring of a new chief financial officer who has extensive experience in Canada's financial services industry. The company said Brad Kotush, a former CFO at Canaccord Genuity Group Inc., will join the lender as of Sept. 1.