Warren Buffett’s Berkshire Makes Home Capital Group An Offer They Can’t Refuse

The godfather of Wall Street must be getting ready to party like it’s 1999. Home Capital Group (HCG), the mortgage lender that’s had a rough year, struck a deal to sell a significant stake to a division of Warren Buffett’s Berkshire Hathaway. The deal would be through Berkshire’s Columbia Insurance Group, and would see the company acquire 38.39% of shares. This would make them the largest single shareholder of the firm, which sounds awesome. Let’s just dive into the details to see what shareholders will have to pay to get them to buy in. Oh yeah, you didn’t hear HCG is giving them a significant discount and preventing shareholders from voting on the initial investment?

Berkshire’s Initial Investment of $153 Million

The initial investment would see Columbia acquire a significant stake out the door, and HCG is asking the TSX to skip shareholder approval. Columbia will acquire 16,044,580 common shares, roughly 19.99% equity, at a cost of $153,225,739. HCG said they would be priced at $9.55 per common share, which is a “15% discount to the 5-day volume-weighted average price (VWAP)” ending June 13, 2017, and 56% lower than yesterday’s close. The deal is expected to close on June 29, 2017, pending the TSX approves the “financial hardship” provisions filed that would allow them to skip running this by shareholders. If the deal goes through and shares remain at around yesterday’s close, shareholders will have pretty much given Berkshire ~$86,640,732 in profits for just this phase.

Berkshire’s Additional Investment of Over $246 Million

The additional investment will be subject to shareholder approval, and a slightly higher price. The second phase of investment would see 23,955,420 shares acquired for C$246,774,261, which is ~$10.50 per share. This is an 8% discount to the VWAP ending June 13, and 29% cheaper than yesterday’s close. The shareholder vote won’t be until September 2017, but if share prices remain at close to yesterday’s level, shareholders will be giving Berkshire another $111,359,268 in profits. But wait, there’s more!

Berkshire Is Now The Lender of The C$2 Billion Loan

Berkshire will replace the C$2 billion loan facility previously announced, a.k.a. the emergency credit line, with slightly better terms. The interest rate on the outstanding balance will be lowered from 10% to 9.5% until completion of the initial investment, when it gets reduced to 9%. The standby fee on undrawn funds will be reduced to 1.75% (from 2.5%). Once the initial investment completes, it will be reduced to 1%. They’re still required to do a minimum of one year, and they don’t have to pay an upfront fee. The company said the rest of the terms are identical, so it’s assumed the C$2 billion is being secured with C$4 billion in mortgages.

Once again, awesome deal for Berkshire’s Columbia. At minimum if HCG doesn’t touch the credit, they’ll pay a minimum of C$20 million just to have the ability to access it. If they withdraw the capital, they can pay up to C$180 million in interest for just one year. For Columbia to lose money on the loan, HCG would have to use all of the credit, never make a payment, and more than half of the mortgages they secured it with would have to not pay – a very unlikely scenario.

If everything goes in Berkshire’s favor, they stand to make over C$242 million by my conservative estimate – right out the gate. Great deal for the firm, it remains to be seen if it’s a great deal for HCG shareholders.

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