Canada regulator steps up antitrust review of Smith Financial bid for Home Capital

First National Financial

04/04/2023 21:05

(Adds background, quote from HCG shareholder)
    By Divya Rajagopal and Maiya Keidan
       TORONTO, April 4 (Reuters) - Canada's antitrust
regulator said on Tuesday it has sought additional information
in its review of Smith Financial Corp's planned C$1.7 billion
($1.3 billion) bid for lender Home Capital Group Inc (HCG)
 HCG.TO .
    The Competition Bureau Canada was responding to a Reuters
query on whether it had issued the companies any supplementary
information request (SIR).
        "I can confirm that the Competition Bureau is reviewing
the potential acquisition of Home Capital Group by Smith
Financial Corporation," a bureau spokesperson said in an email.
    The regulator declined to provide a timeline of its review,
saying it is obligated to "conduct its work confidentially."
Home Capital and Smith Financial were unavailable for immediate
comment.
    The bureau seeks additional information from merger partners
when an acquisition raises concerns about substantial lessening
of competition.
        Canada's already consolidated banking industry had two
more M&A deals last year, including Smith Financial's Home
Capital bid, giving six lenders control of about 90% of the
market. Consumer advocates have complained about higher
transaction fees than in the United States.
  
        Last year, Royal Bank of Canada  RY.TO  announced the
purchase of HSBC's Canada unit, a transaction also under
regulatory review.
  
        Home Capital, rescued by Warren Buffett's Berkshire
Hathaway Inc  BRKa.N  five years ago, announced in November it
would be taken private by Smith Financial. Canada's housing
market and mortgage lending slowed as interest rates spiked
after exponential price growth during the pandemic.
    Home Capital, which caters to borrowers shunned by big
lenders, set aside C$10.4 million for bad loan in the 2022
fourth quarter, up from C$1 million in the year-ago period. 
        "There is no surprise that the competition bureau is
reviewing this transaction; in fact, it should have been
expected," said Arthur Salzer, CEO at Northland Wealth
Management, a Home Capital shareholder.
  
        Salzer said he expects the sale to be approved and Home
Capital to retain its focus on so-called alternative borrowers
with weaker income documentation, such as the self-employed, new
immigrants and those with a poor credit history.
  
        Controlled by billionaire Stephen Smith, Smith Financial
is also the co-founder of Home Capital's larger rival First
National Financial Corp  FN.TO . It is a top shareholder of
lender EQB Inc  EQB.TO , one of Canada's leading alternative
lenders and the country's ninth largest publicly traded bank.
        The competition bureau's main concern is that the Home
Capital deal will result in Smith Financial controlling too
large a share of the alternate market, said a hedge manager who
is closely watching the transaction.
  
        Smith also co-owns Canada Guaranty Mortgage Insurance
Company, in partnership with Ontario Teacher's Pension Plan. He
is chairman and co-owner of Duo Bank of Canada.
  
        Shareholders voted 99.8% in favor of approving the deal
at a special meeting on Feb. 8.
    If Smith Financial does not close the deal before the May 20
deadline, it has to pay shareholders an extra 25 Canadian cents
per share for every three months of delay.

 (Reporting by Divya Rajagopal and Maiya Keidan in Toronto;
additional reporting by Ismail Shakil; Editing by Denny Thomas,
Franklin Paul and Richard Chang)
 ((ismail.shakil@tr.com;))