Genworth Financial: $5.43 Per Share Buyout Could Close Before End Of November

Genworth Financial (GNW) had blowout earnings when it earned $0.82 per share Q3 2020. The business fundamentals are strong. To me, it seems like a company worth over $10 in a couple years is preparing to sell to China Oceanwide (OTC:HHRBF) for $5.43 as soon as this month as part of a deal that was arranged back in 2016 and has been on a multi-year adventure of garnering regulatory approvals from around the world until earlier this year, when COVID-19 brought the financing into question. After getting all the approvals, the deal was put on ice until the COVID-19 storm passed, and the financing was put on hold until the second half of this year. The deal was set to close late September, but the deal was extended due to travel restrictions prohibiting the face-to-face meetings necessary to close the deal. More recently, the deal was extended to November 30th, and the financing is expected to be finalized by the end of November.

Investment Thesis

I think China Oceanwide is a motivated buyer of Genworth Financial. The two companies have worked diligently through 16 extensions, and now Hony Capital expects to be able to finalize the $1.8 billion financing this month. That, along with a few perfunctory approvals, gets this deal across the finish line. The stock has been soaring up over 100% in the past 3 months. There is still 20% upside for what is arguably as close to a done deal as you can get without it actually being done. The purpose of this article is to highlight statements made by the Genworth CEO that reassure investors that this deal is getting done.

Q3 2020 Call Highlight 1: Acquisition Financing Nearly Complete

First, the CEO Tom McInerney has made it pretty clear that the financing is nearly done (emphasis added):

I think the Hony and the partners have been arranged pretty much and the 35% of the funding comes from Mainland China, so I think that's a good shape. Obviously, we are dependent on the actual funding of those together, the $2.7 billion on the approval of NDRC and then the SAFE authorization, the window how that conversion process works.

We do think that, I mean, obviously, I don't want to get ahead of the Chinese regulators, it's their decision to make, but from the beginning, based on a number of conversations that I've had with the - Chairman LU was very close to all of them. We do believe that they continue to support the deal. So, it would be November 5 today so in the next three weeks or so, we hope those approvals come in from NDRC and SAFE and then the money would be wired out of Mainland China and then Hony Capital would transfer its $1.8 billion and then we'd be able to close the deal by the end of November, that's the plan.

That's more visibility than we had previously. The money seems to be more pending NDRC and SAFE approvals at this point versus the money actually being put together, which is huge and to me is worth $4.75-5.25 per share if I am interpreting that correctly.

Q3 2020 Call Highlight 2: Acquisition Financing Not Contingent

Second, the CEO, Tom McInerney, pointed out that the financing to buy Genworth from Hony Capital is separate from the financing for the San Francisco property:

The Hony Capital funds that are looking at the San Francisco property and then the funds for our deal are totally separate funds of Hony Capital. And the transaction, it's sort of a bridge loan to Oceanwide, two years provided by the Hony Capital Mezzanine Fund LP, which is a - it's a listed fund. And then for the San Francisco property, the - there is a Hony Capital real estate fund that is the counterparty in that transaction. So, both Hony Capital is a general partner and limited partners, these are different funds with different priorities. One is real estate fund and the other is a mezzanine debt fund.

Previously, I had suggested that the funding may overlap. This hypothetical concern has thus been extinguished.

Q3 2020 Call Highlight 3: IPO of USMI May Happen With COW Acquisition

Previously, it has mostly only been contemplated that the USMI business would be sold off if the Genworth acquisition by China Oceanwide fell through. The CEO of Genworth is now talking about moving forward with the IPO anyway, even with Genworth being acquired:

So that is - it's possible. it'll be up to the - obviously, the new goal post closing, but there is a possibility that we would decide to do the IPO anyway. If by doing that, that allows us to get to the ratings that we think we deserve now, if that makes sense.

I think this is interesting because it may be part of China Oceanwide's plan to recoup some of its $2.8 billion investment.

Summary and Conclusion

I am confident the buyout for Genworth will happen as planned at $5.43, most likely by the end of this month. As Genworth and Oceanwide have continued to make progress on the financing of this transaction, the stock has soared over 100%, and merger arbitrage investors still seem asleep at the wheel with over 20% left on the table for something that is scheduled to close in less than three weeks. Lots of investors invest into securities expecting ~5% return or less per year, and as such, Genworth being sold at its current prevailing market prices indicates that this deal is not less than a month from closing but years from closing. Further, the current market price seems to ignore the strong growing intrinsic value of the mortgage insurance business. The question I ask myself is, what requires an 8-K press release these days?

1. Final agreement between Hony and China Oceanwide
2. NDRC Re-approval
3. Delaware confirmation
4. SAFE approval

Somewhere in there, I would think there has to be some sort of news flow from Deal Reporter or an 8-K put out informing investors that the deal has made significant progress. Lastly, I would think China Oceanwide may start to feel that it does not have much time to close this deal at $5.43; because with Genworth's business improving on all fronts and blowout earnings, shareholders can be expected to pressure the company to ask for a better deal at the annual meeting if the deal is not closed by then. The current extension runs out at the end of this month, and I expect to hear major constructive news either in pieces or all at once before that as part of the closing process - at which point, the close date will probably be moved forward to some agreed upon-date before the end of the month.

Disclosure: I am/we are long GNW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.