rejected

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

Home Capital shares and prospects have improved since the American billionaire’s conglomerate announced in June that it would support the embattled alternative lender through an investment of $153 million, acquiring a 19.99% stake in the company, and by providing it with a $2-billion line of credit.

The financial lifeline provided much needed 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.

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Berkshire Hathaway also agreed in June to invest a further $246.7 million, at $10.30 per share, which would increase its indirect stake in Home Capital to 38.4%, pending shareholders approval in a vote on Sept. 12.

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

Read: Court approves Home Capital class-action settlement

“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,” the firm said.

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

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.

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.

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Originally published on Advisor.ca
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