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).
Previous offers:
- 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%.
Tax considerations
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.
Can any IB account holders confirm if taxes are being withheld in an IRA?
The last time HCG did a tender offer, IB did not withhold any taxes.
Thanks
No, you are good to go with an IRA account. Nothing is withheld. Due to the tax withholding issue, these odd lot Canadian SIBs generate much less interest than our US modified dutch auctions. I don’t have actual data to back this up, but it seems like proration—if any—tends to be much lower, with a closer proximity to the to the upper end of the range, as well. Again, that’s anecdotal, but I’ve probably probably participated in 80–100 of these over the last 6–7 years.
Does anyone with a Fidelity IRA or 401k know if they withheld taxes?
Looks like can also do this by buying HMCBF? Does anyone know for sure?
I bought HMCBF a week ago and was able to tender it via Vanguard’s system.
TradeBlock says that HMCBF is not participating in the Dutch Tender offer. So apparently, not all brokers allow HMCBF.
I called Vanguard and was told that there would not be withholding for IRAs
Another Substantial Issuer Bid with an odd-lot feature is trading below the low end of range, as well, though it isn’t nearly as lucrative.
LNF.TO
Current price: C$24.05
Offer range: C$24.30–C$25.05
Expiration: Dec 30
Add a final odd-lot SIB perhaps worth monitoring next week:
FFH.TO/FRFHF
Current price of FRFHF: US$454
Offer range: US$425–$500
Both trade far enough above paid-up capital that participation through US taxable accounts would result in losing money.
For US holders in a taxable account who complete the odd-lot tender, would not this be considered a sale rather than a distribution, therefore paid-up capital is not an issue?
From page 37
The company’s purchase of Shares from a U.S holder pursuant to the Offer will be treated either as a sale of the shares or as a distribution by the company, depending upon the circumstances at the time the Shares are purchased. The purchase of Shares from a US holder with be treated as a sale if (a) the purchase results in a ‘complete redemption’ of the US holders equity interest in the company.
In an odd lot tender all shares are tendered therefore the above criteria to be considered a sale is met.
Any comments?
Thanks
You may be technically correct, but good luck trying to get through to someone at your broker who can adjust the witholding.
Thanks for your reply Michael, Lax. I saw you did the same post several years ago, back from 2018.
https://www.specialsituationinvestments.com/2018/11/home-capital-group-hcg-to-tender-offer-6-upside/
I presume you had difficulty adjusting the withholding?
I am glad I came over this post before committing.
Yes, IB was not helpful at all, just said they go by what the company reports
Thank you. Very informative. I guess it might a good strategy to do this in an IRA as alluded above!
Hi all. Is it really the case that non-canadian stock holders cannot participate (i.e. european e.g.)?
Seems like market distorting. And if not european holders can participate, how will they determine whether you are canadian or not?
Anyone can participate, however, non-residents might be subject to withholding taxes on the deemed dividend part of the distribution.
Thanks for the reply, dt. What is the deemed dividend part? The paid-up capital?
Sorry for asking but I’m new to these odd lot tender offers.
For Canadian companies the dividend part is equal to the difference between the tender price and paid-up capital.
For more details, please refer to pages 33-35 of the circular – unable to paste it here, as the document seems to be locked from copying on Sedar.
Is there any difference in lead time to buy for these Canadian tenders at IB , vs US tenders.
ie, whats the last date you could buy HMCBF and be able to tender?
Also, is there any reason to prefer the native Canada listed stock to the over the counter pink sheet version in these tenders ?
Preliminary results are out, the tender ended up oversubscribed (45% proration) and priced at the lower limit. Odd lots were able to book low-risk C$200 gain in 1 month.
http://homecapital2018corp.q4web.com/news/press-release-details/2021/Home-Capital-Announces-Preliminary-Results-of-Substantial-Issuer-Bid/default.aspx
For those using a US retirement account, has the cash hit your account? I did the trade using fidelity and it’s still pending.
Still waiting at IB
Got my cash yesterday. $33.779 or C$43. Less than the C$43.50 offer price for some reason.
Another tender, much lower price now vs Dec2021. C$25.20 to C$28.60, vs C$27 current price.
https://finance.yahoo.com/news/home-capital-announces-commencement-substantial-110000205.html