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Research Flash - Home Capital Group Inc. (HCG:TSX,$28.08|N/R) Takeout Bid Highlights Intrinsic Value

What happened: Home Capital announced that it has received an unsolicited non-binding expression of interest for acquiring the Company which its board of directors declined. The offer came in after HCG announced its SIB for up to $115M in the range of $25.20 to $28.60/share. The offer price exceeded the high end of the SIB range and was an all-cash consideration. The board formed a special committee of non-executive independent directors to review the non-binding offer. The board believed that the offer was too low relative to their perceived intrinsic value and future growth potential. The offer also required the SIB to not be completed.

What’s next: HCG will proceed with its SIB for up to $115M or 11% of its shares outstanding, expiring on September 13th after market close (unless extended or withdrawn). Home Capital can revise its buyback price range higher if needed.

Other Details:

  • Fairstone Bank has been rumoured as the leading candidate as the acquiror as it has been building its near-prime portfolio

  • Onex Corp. and Brookfield Asset Management made previous unsuccessful bids for Home Capital in 2017. Brookfield acquired Genworth Financial Mortgage Insurance Company in 2020

Why we like this trade:

  • HCG is trading at a trough valuation at 0.7x book value ($38.72/share) compared to the ten-year average of 1.3x

  • Comparable transactions in the space occurred around 1.0x BV

  • The SIB provides a backstop for the stock price in the near term

  • The stock is highly liquid and can support the potential acquiror building a position in the open market

20220907 - M Partners - HCG - Flash
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