Current Price: C$41.46
Offer Price: C$43.50 – C$48.50
Upside: C$200 – C$700 (upper and lower limit for odd lots)
Expiration Date: 21st December 2021
A quick note on an odd-lot offer as the share price has declined below the lower limit.
Canada’s alternative mortgage lender, Home Capital Group, launched a substantial issuer bid for 12%-14% of outstanding shares at $43.50 – $48.50/share. Odd lot shareholders will be accepted on a priority basis. Paid-up capital is just C$3.06/share, so withholding taxes are going to be high. The idea is actionable only to Canadian residents (and potentially US IRA accounts). As HCG trades below the lower limit price, the situation offers low-risk C$200+ profit in a few weeks. The offer expires on the 21st of December.
Participating with a larger position is risky. The circular states that so far it is unknown if the largest shareholder, Turtle Creek with 15% ownership, is going to participate. Management owns a negligible amount of shares. Two out of three last HCG tender offers (see more below) ended up oversubscribed and priced at the lower limit. The current offer is done at 7 year high prices and comes at 1.2x TBV. However, company’s profitability is also at an all-time high (15% annualized ROE this year) due to the booming mortgage market (ROE of 8%-10% during 2018-2020). It is possible that many shareholders will opt to cash out in the current offer before the mortgage market normalizes. A similar but smaller tender for 7.5% shares at 1.2x TBV in 2019 ended up oversubscribed and priced at the lower limit with proration at 53% (by the way HCG also traded below the lower limit during the tender).
- March 2016 – for 6.3% outs. shares at C$34-C$38/share (1.4x TBV at lower limit). Including odd-lot provision. Ended up priced close to the upper limit – C$37.60/share.
- November 2018 – for 22.5% shares at C$16.50-$18.50/share. No odd lot provision. Priced at 31% discount to BV at the lower limit, while HCG generated 7.7% ROE in 2018. Ended up oversubscribed and priced at C$16.50/share, most likely due to Berkshire (Buffet) tendering a large position (owned 20% outstanding shares at the time). Proration was 83%.
- December 2019 – 7.5% shares at C$34.15-C$37.25/share. 1.2x TBV, while HCG generated 8.5% ROE in 2019. The offer was oversubscribed, priced at the lower limit with proration at 53%.
Please refer to pages 33-35 of the Issuer Bid Circular for tax considerations related to this offer. Canadian residents will be deemed to receive a taxable dividend above the amount of C$3.06 paid-up capital. The company intends to designate all deemed dividends arising from the offer as eligible dividends for tax credit purposes. Non-Canadian residents will be subject to withholding taxes on the distributions above the C$3.06 paid-up capital – thus participation in the offer pays off only for accounts that are exempt from withholding taxes or investors able to recover/offset withholding taxes paid in Canada.
Home Capital Group
HCG is a Canadian subprime mortgage lender. Operations include residential and non-residential mortgage lending, securitization of residential mortgage products, consumer lending, and credit card services. In addition, Home Trust and its wholly-owned subsidiary, Home Bank, offer deposits via brokers and financial planners, and through a direct-to-consumer brand, Oaken Financial.