Billionaire Smith Haggled Home Capital Price Down as Rates Rose

(Bloomberg) — For prospective Canadian homebuyers, last year’s housing slump knocked about $72,000 off the price of a typical home. For billionaire Stephen Smith, who bought one of the country’s biggest alternative home lenders, it may have saved more than $200 million.

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Smith first offered to buy Home Capital Group Inc. for C$44 a share last April, but the lender’s board asked for C$47 a share instead, according to a regulatory filing released Tuesday. Then, rapidly-rising rates tanked the housing market, eroding the company’s profitability and share price. Directors eventually came around to accepting Smith’s original bid — even though, by that time, the firm had fewer shares outstanding.

The takeover deal struck in November valued Home Capital at C$1.7 billion ($1.3 billion) — instead of the C$1.9 billion of his first offer and the more than C$2 billion the company countered with, according to Bloomberg calculations.

Just like anyone who bought a home last year, some of Smith’s savings on Home Capital’s ticket price may be swallowed up by the increased cost of the debt he plans to use to buy it. But the behind-the-scenes mechanics of the deal illustrate the power shift from sellers to buyers in the Canadian real estate sector — or at least, those buyers with cash. Smith, who co-founded First National Financial Corp. in 1988 and became a billionaire through the country’s long housing boom, may have merely been one of the first, and biggest, to act.

In an interview after the Home Capital deal was announced, Smith said he’d started buying its shares around January and February, when global central banks’ turn to tighter monetary policy started to weigh on the stock. Starting in March, the Bank of Canada began raising its overnight rate from 0.25% to 4.25% today, one of the fastest rate-tightening campaigns in the institution’s history.

That drove home prices down as higher borrowing costs forced prospective buyers from the market, and Home Capital’s shares fell further. Rising rates hurt mortgage originations and caused an immediate squeeze on profitability, as the company had to pay more for deposits, while most of the payments it collects from its mortgages are fixed.

It was against this backdrop that negotiations between Smith and Home Capital played out last year. Smith’s second offer was C$37.50 per share, followed by C$41, before the C$44 price was finally negotiated between the two parties, the filings show.

When the deal was announced, Smith expressed faith that with unemployment low, Canadians will continue paying their mortgages — even in a slowing economy — and that home prices will eventually rebound from their current downturn.

But, so far not many other Canadians are take advantage of the discounts cropping up in the housing market. Last month, just a little over 3,000 homes were sold in Toronto, Canada’s largest city, as benchmark prices fell for the ninth straight month. A recent report by Royal Bank of Canada showed that, despite the decline in prices, housing affordability has reached its worst-ever level because borrowing costs have risen so much faster, and most people rely on a mortgage to fund the bulk of the purchase.

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