Did Home Capital Group Inc. Make a Mistake Rejecting Warren Buffett’s Additional Investment?

Home Capital Group Inc.’s (TSX:HCG) shareholders voted on Tuesday to overwhelmingly reject an additional investment from Berkshire Hathaway Inc. that would have seen its ownership stake rise to over 38% of the alternative lender. The deal would have allowed Berkshire to acquire nearly 24 million shares at a price of just $10.30 — a sizeable discount from the $14.24 the stock was trading at as of Monday’s close.

It was in June of this year when Warren Buffett’s company gave the company a lifeline with a line of credit and an initial investment. At that time, there was a lot of pessimism around the company, and the investment by Buffett immediately shot the share price up to $19 — a value not seen since before the company announced it needed a credit line and was seeing a significant decline in deposits.

Have deposits come back?

Let’s have a look at what impact Warren Buffett’s initial investment has had and if Home Capital is in fact in better shape than it was.

The announcement of the Berkshire investment was on June 22, and at that time Home Capital had $111 million in high-interest savings accounts, $141 million in Oaken savings accounts, and $12.025 billion in GICs. Fast forward to August 2, and the company was up to $126 million deposited in its high-interest savings accounts (+3.5%), $186 million in Oaken savings (+32%), and $12.48 billion invested in GICs (+3.8%).

Certainly, the impact of the investment has helped consumer confidence as Home Capital has seen an improvement across all of these accounts, while also seeing overall liquidity improve; the company paid back the initial $2 billion line of credit from Berkshire Hathaway. With the settlement of a class-action lawsuit related to the company’s troubled past, a lot of the issues plaguing the company appear to be in its rear-view mirror, and now investors can focus on the company’s current performance.

Did shareholders make a mistake?

Early results are that the company may be on the right track and Home Capital could be on the path to recovery, but until Q3 results come out, we won’t have a good picture of how well the company is truly performing.

Home Capital is not losing Warren Buffett’s initial investment; it’s only saying no to more of it. The advantage of saying no is that the company could raise more money through an offering with the share price currently trading at about$14, rather than the discounted price that Berkshire would have had to pay.

The disadvantage to saying no to the additional investment is that Warren Buffett’s total stake in the company is less, and with a close-to-majority stake in the company, he would have a very significant hold on its operations. By having a significant stake and influence in the company, he could help ensure that it is on the right track.

In the short term, shareholders may have made the right decision to not undervalue the current share price, but in the long term, I think this may go down as a missed opportunity.


Fool contributor David Jagielski has no position in any stocks mentioned. The Motley Fool owns shares of Berkshire Hathaway (B shares).

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