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opinion

Brendan Calder is a professor of management at the Rotman School of Management, University of Toronto, and former CEO of CIBC Mortgages Inc.

Home Capital shareholders have an important decision to make ahead of a special shareholders meeting on Sept. 12. They need to decide whether to vote in favour of a second tranche investment by Warren Buffett's Berkshire Hathaway, which would increase its ownership stake from 19.9 per cent to 38.4 per cent.

There has been considerable media coverage over the past few weeks regarding concerns expressed by a few shareholders that approval of the second tranche would result in unnecessary dilution and that the company does not require additional capital at this time.

However, there has been very little media coverage on the benefits to all Home Capital stakeholders from Berkshire Hathaway increasing its ownership stake.

If the majority of shareholders vote in favour of the second tranche and Berkshire Hathaway becomes a 38.4-per-cent shareholder, there are many long-term benefits to all involved in Home Capital. These stakeholders not only include shareholders, but also the company's customers, employees, management and directors, as well as depositors and lenders that will finance the future growth of the company. Some of these benefits:

  • Mr. Buffett is a long-term investor, unlike many equity funds that plan to monetize their investments within a five-year period.
  • A 38.4-per-cent stake would demonstrate to the market that Berkshire Hathaway is committed to the long-term success of the company. This commitment by Mr. Buffett, the world’s most successful investor, would represent a tremendous vote of confidence in the future of the company and his commitment to facilitate its continuing success.
  • The long-term stability of the company would provide assurance to the depositors and lenders who are key to financing the future growth of the company.
  • This vote of confidence would also provide comfort to current and future customers, the board of directors, the management team and all employees.
  • While the company does not require this amount of additional capital now, the second tranche would position it to capitalize on future accretive acquisition opportunities, adding value for shareholders.

Shareholders also need to consider the risks of voting against the second tranche. Some of these risks:

  • If Berkshire Hathaway only owned 19.9 per cent of Home Capital, it is reasonable to assume that Mr. Buffett’s firm would not necessarily be a long-term shareholder. It would not likely be committed to supporting the company over the long term, for its future success.
  • And, as a result, all Home Capital stakeholders (customers, employees, management, directors, depositors and lenders) would be deprived of the long-term benefits (confidence, assurance and added capital) they would experience if Berkshire Hathaway was a 38.4-per-cent shareholder.

Reflecting on the pros and cons of the second-tranche financing, there is a compelling case that the long-term advantages of voting in favour of the financing outweigh the disadvantages of short-term shareholder dilution.

Home Capital has an excellent board of directors and has recently appointed a new president and chief executive officer and chief financial officer. The board has a fiduciary responsibility to act in the best interests of all stakeholders. They have retained the services of two top Canadian investment banks – BMO Nesbitt Burns and RBC Dominion Securities – as well as Blair Franklin Capital Partners, an independent advisory firm. All three financial advisers provided an opinion that the terms of the second tranche were fair from a financial point of view. The board unanimously recommended to all shareholders that they vote in favour of the second tranche.

Hopefully, after reflecting on the information, shareholders will make the right decision in the best interests of Home Capital's long-term success. Shareholders who have already voted against the second tranche but now recognize the benefits can still change their vote before the Sept. 12 shareholder meeting.

National Bank chief economist Stefane Marion says consumers should expect another quarter-point increase in the Bank of Canada’s key interest rate this year. The central bank hiked its rate Wednesday by 25 basis points.

The Canadian Press

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