The plummeting Canadian home sales and prices have prompted one of the country’s major financial industry investors to put $1.7 billion (US$1.3 billion) into betting against a prolonged recession.
Smith Financial Corporation, the family holding company of First National Financial Corporation co-founder Stephen Smith, offers Canadian mortgage lender Home Capital Group $44 a share. Interest rates have pushed Canadian home prices down 10% from their peak, boosting investor interest in mortgage lenders.
Smith’s offer is slightly below where Home Capital was trading a year ago. “We are seeing headwinds in the macro environment right now,” he said in an interview. “As a result, I think it provided an opportunity to buy the company.”
Smith, 71, is familiar with the peaks and valleys of the Canadian real estate sector. He co-founded his mortgage company First National in 1988, two years before the market suffered a significant decline. He continues to serve as Chairman of First National, where his 37% stake in the company is worth approximately $792 million at current prices.
He also owns a family holding company with assets totaling $5 billion, including shares in Canada’s Fairstone Bank, Canada Guaranteed Mortgage Insurance Company, EQB Inc., Glass Lewis & Co., and private equity manager Peloton Capital Management. was established. .
Smith began buying Home Capital shares with a view to a possible takeover around January and February, when stocks were already falling from their peak as global central banks signaled a shift toward tightening policies. said he did.
Home Capital said in August it had rejected a takeover offer from an unidentified buyer because the price was too low. Smith declined to comment on whether he was the bidder.
The stock was briefly shaken by the disclosure, but soon resumed its decline. Shares soared 59% on Monday, with him trading at $42.37 at 12:54 p.m. Toronto time.
Smith believes the market has gone too far in turning its back on mortgage companies. Lender health is more closely correlated with unemployment, which determines consumers’ ability to continue paying for their homes, and unemployment remains at historically low levels, he said.
“People will pay their mortgages as long as they work,” says Smith. “If you buy a house and it drops 10%, are you going to stop paying your mortgage? No, you’re going to keep paying your mortgage.”
Longer term, Canadian housing supply will continue to be subdued, with high immigration levels boosting demand and helping prices recover from the current slump, he said.
The deal marks the end of decades in the public markets for Home Capital. The company nearly collapsed five years before him amid allegations of misleading shareholders in mortgage fraud and was bailed out by Warren Buffett-led Berkshire Hathaway, who sold its shares at a profit .
These issues are “entirely” behind Home Capital, Smith said, adding that his company undertook “extensive” due diligence before making the purchase.
The deal is subject to approval by two-thirds of Home Capital’s shareholders and regulatory approvals, which the companies hope to close by the middle of next year. The deal includes a go-shop period through December 30 and a break-even fee of $25 million and he’s $50 million, depending on when the deal is broken.
The acquisition is being funded with equity from Smith’s holding company and debt raised through Royal Bank of Canada, Smith said. He declined to specify the amount of any part of the funding.
Home Capital CEO Yousry Bissada and the management team he assembled were key factors in the decision to acquire the company, Smith said. Home Capital will retain its current management team and will operate as a private, independent company, Smith said.
“Home Capital is in a very dominant, strong and very defensive position in the Canadian housing market,” Smith said. “They have good risk management, they have a good underwriting system, and they trust Canadian consumers and the Canadian housing market.”