Value Investors Club / GENWORTH FINANCIAL INC (GNW)

Description

This will just be a quick note because I believe its timely. I recommend purchasing GNW

common shares around $4 to receive the $5.43 purchase consideration from its deal to be sold

to China Oceanwide Holdings Co., Ltd. (COw). We expect the deal to close between March

29th, 2019 and June 30

, 2019.

This deal has suffered from considerable skepticism and for good reason. GNW is slated to be

purchased by a private Chinese company with opaque financials, in a difficult trade

environment between the U.S. and China and amidst a policy from China that has forcibly been

negative towards Chinese foreign investment.

Furthermore, GNW, is a heavily leveraged insurance holding company with an extremely

troubled Long Term Care (LTC) business.

The crux of my thesis is this:

The merger consideration is 35% above the current market price of GNW stock and reflects

1. meaningful fatigue from a process that has been going on for over 26 months

2. A complicated regulatory approval process for a small deal (multiple state insurance

commissioner approvals were required in addition to CFIUS, Canada and China’s NRDC

vs $2.7 billion merger consideration)

3. Foreign, particularly Chinese, private acquirer.

GNW has recently traded down 20% (from approximately $5 in January) because of delays in

the final significant regulatory approval required (Canada) and because of events and new

reports which have sown doubt as to China Oceanwide’s ability to close the deal.

- Specifically, China Oceanwide halted construction on Oceanwide Plaza a luxury condo

project in downtown Los Angeles citing a need to restructure financing. They promised

to restart construction in mid February which has not occurred.

- Furthermore, the auditor of China Oceanwide Holdings Limited (HK 715), a Hong Kong

Listed real estate focused subsidiary of COw, resigned in late February. Given HK715 is a

Bermuda based corporation it is not required to disclose if there was a disagreement

with management over any accounting. Given how similar the names of the private PRC

based COw and the HK715, there was some initial confusion that COw’s auditor had

resigned. HK715 represents approximate 5-6% of COw asset base and is not material to

COw’s ability to close.

COw and GNW each had the right to walk from the deal with no consequences as of March 15,

2019. On March 14th, COw and GNW agreed to extend the merger agreement to April 30th. If it

WAS TRUE that COw had financial difficulties, they could have easily walked away from the deal

this week blaming it on Canadian regulators. I believe COw agreeing to an extension debunks

the bear thesis that COw is having financial difficulties and cannot close the deal even if they

want to.

My sum of the parts valuation for GNW (assuming no value for the LTC business) is

approximately $5 per share (see below).

- The Australian and Canadian Mortgage Insurance (MI) subsidiaries are publicly traded

and easy to value. The U.S. MI business has multiple comps in the U.S. and should also

be easily to value.

- The key assumption to make (which is supported by Management comments) is that the

insurance regulators in the U.S. cannot force the GNW holding company to add

additional capital to the LTC business. If you do not agree with this or believe the

insurance regulators will restrict dividends from the MI subs unless contributions are

made to LTC then you don’t want to own this.

The last remaining approvals required for the deal to close are threefold:

1. Canada is conducting a process similar to CFIUS (which was approved in the U.S.)

2. FINRA (per the company the deal can close before this approval is received)

3. China’s State Administration of Foreign Exchange (SAFE)

Canada

Sounds close to me and there are alternatives.

It is my understanding that the process in Canada will remain open ended

until Canada determines the file is complete and then there is a 30 day clock which Canada

does not have to use all of. Per the disclosure below it sounds as if they are close to a complete

file. Even if it will take another 60 to 90 days, the 35% spread warrants waiting now that COw

has reaffirmed it desire to pursue the deal.

Per the company’s March 14th Press release:

Genworth and Oceanwide continue to diligently pursue approval by Canadian regulators of the

transaction. As previously disclosed, the parties' discussions with the Canadian regulators have to date

been focused on national security matters, including data protections and the safeguarding of our

customers' personally identifiable information, consistent with the Enhanced Data Security Program that

Genworth and Oceanwide have undertaken in connection with the clearance of the transaction by the

Committee on Foreign Investment in the United States (CFIUS). While Genworth and Oceanwide have

fully responded to all information requests to date, the Canadian regulators have not outlined a timeframe

for the completion of their review of the transaction or requested any additional information at this time.

Furthermore, given that Canada is a publically traded business a sale of all or part of GNW’s

57% stake could allow the parties to more forward with Canadian approval. It my

understanding that GNW would have to cut its stake down to 35%. Genworth’s management

has stated in the past that they would be willing to sell the Canadian MI business to reduce

leverage should that be necessary. We don’t believe the Canadian MI business is key to COw’s

interest in GNW.

FINRA

Per the company:

Approval by the U.S. Financial Industry Regulatory Authority (FINRA) also remains outstanding, but

pursuant to FINRA rules, the transaction may proceed and closing may occur before such approval is

obtained.

China’s State Administration of Foreign Exchange (SAFE)

Given NXPI this is the one that scares people. However, it was not SAFE that scuttled the

QCOM-NXPI deal. That was China’s anti-trust authority. COw and GNW have already received

the key Chinese approval, the NDRC which oversees economic planning and who’s approval is

required for significant foreign investments by Chinese companies. We believe SAFE is a more a

procedural check point to ensure stability in exchange rates not a policy making body.

Furthermore, given that the COw-GNW deal was signed over two years ago and Chinese policy

towards foreign investment has become clear in that time, we believe COw would have

received the signal not to go forward with this deal if it were not supported. The merger

agreement has been extended NINE times over the past year or so, including this week. COw

could have walked at any of these junctures.

Sum-of-Parts


		Market Cap	Exchange Rate	LTM Income after Tax	Multiple	Sum of Parts	10% Holdco Discount
Canada	57%	3700	0.75			1,587	1,428.57
Australia	52%	1082	0.71			399	359.53
United States	100%			490	7.5	3,675	3,675
Holdco Net Cash						504	504
						(3,600)	(3,600)
						2,566	2,367
						504.2	504

						$ 5.09	$ 4.69

Sum of the parts assumed azero value for LTC care or the run-off business. Long Term Care has over $15 of GAAP book value but is believed to be billions of dollars under reserved. The run-off business has a GAAP book vlaue of about $1.20 per share but i have not confirmed whether it is a sub of the Life/LTC business or held directly by the holding company.

RISKS

Canada Approval continues to take a long time

China Oceanwide can walk from the deal after April 30th

Market fears GNW could be compelled to contribute capital to the troubled LTC business

Significant leverage at the holding company

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Canadian Approval

Sale of Canadian Business is Canadian approval cannot be obtained in a reasonable timeframe

Closing of the $5.43 deal.

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			2019	2020
Price:	4.00	EPS	0	0
Shares Out. (in M):	504	P/E	0	0
Market Cap (in $M):	2,020	P/FCF	0	0
Net Debt (in $M):	3,100	EBIT	0	0
TEV (in $M):	5,120	TEV/EBIT	0	0