August 30, 2017 / 2:48 PM / 4 months ago

Home Capital's Buffett plan opposed by shareholder proxy ISS

TORONTO (Reuters) - Home Capital Group Inc (HCG.TO) could face a revolt over U.S. billionaire Warren Buffett’s plan to increase his stake in the business after proxy advisory firm Institutional Shareholder Services (ISS) recommended voting against it.

Home Capital and Buffett’s Berkshire Hathaway Inc (BRKa.N) investment vehicle agreed in June to a deal worth up to C$400 million ($318 million) for an initial stake of 20 percent in the business. The position could increase to 38 percent if Home Capital shareholders give approval in a vote on Sept. 12.

Under the terms of the deal, Berkshire Hathaway can purchase the additional shares at a price of C$10.30 per share. Shares in Home Capital rose 1 percent to C$13.37 on Wednesday.

Home Capital benefited from Buffett’s initial investment as well as from a C$2 billion credit facility. The deal helped rebuild confidence in the financial strength of the company after depositors withdrew funds from its high-interest savings and Guaranteed Investment Certificate accounts.

Home Capital’s executives had emphasized the importance of having an investor of Buffett’s credibility backing the company.

However, ISS said much of the benefit was already in place after the initial transaction and questioned the benefits for Home Capital’s shareholders of Buffet increasing his stake.

“The proposed Berkshire second tranche appears to offer nominal additional reputation 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.

Home Capital urged shareholders to vote in favor of the deal.

“The board believes that this level of ownership will lead to a stronger commitment from Berkshire to the long-term success of Home Capital,” it said in a statement on Wednesday.

    Another Proxy adviser firm, Glass Lewis, also recommended that Home Capital shareholders vote in favor.

    “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 said in a statement.

    Investors withdrew more than 90 percent of funds from Home Capital’s high interest savings accounts earlier this year.

    The withdrawals accelerated after April 19, when the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business.

    Home Capital reached a settlement with the commission in June and accepted responsibility for misleading investors.

    Editing by Chris Reese and Richard Chang

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