On Wednesday March 27, 2013, Genworth Financial (GNW) reported that it consummated a deal to sell its wealth management business for $412.5 million, or roughly 8% of the $5 billion market capitalization. The sale price was in line with previous reports, where Genworth indicated it wanted between $400 and $450 million for the business. In addition, Genworth reported that it will record a $40 million after-tax loss in connection with the sale, $35 million of which will be recorded in Q1 2013. Therefore, the Genworth holding company also will benefit from reduced future taxes as a result of the loss.
Martin P. Klein, CFO of Genworth Financial, stated: "This transaction is another step forward in executing our strategy, by generating capital from a non-core business and increasing financial flexibility for Genworth. The sale of Wealth Management also provides the opportunity for our employees there and the purchaser to have a strong business to grow going forward."
The stock was up 3% in after-hours trade following the announcement; however, the whimsical market pushed the stock down 3% the following day, a swing of 6%. On the same day, Genworth Financial's competitors in the mortgage insurance business, Radian (RDN) and MGIC Investment Corp (MTG), were up 2% and 6.5%, respectively. It doesn't make much sense, considering Genworth Financial continues to trade at a significant discount to its sum-of-the-parts value with additional catalysts on the horizon to align price more closely to value.
The trading action of Genworth relative to its competitors on March 28, 2013 follows the maxim of Ben Graham: "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." Genworth is still undervalued, irrespective of today's trading action.
The sale of the wealth management division should reduce the conglomerate discount ascribed to Genworth Financial. However, I suspect the news that the company will record a loss on the sale is obfuscating analyst's valuation models in the near term as the market adjusts its future expectations of the company (and estimates of Q1 earnings). Any decrement in Q1 earnings will be transitory, considering the tax loss is a one-time event.
With the greater financial flexibility afforded to management as a result of the sale, one way to produce immediate value for shareholders would be to plow that excess capital into a stock buyback at current prices making it easier to meet earnings expectations in the near-term. A significant buyback would be accretive to shareholders as the equity currently trades at a 0.3x to book multiple, allowing for more of the life insurance and mortgage insurance businesses' earnings and cash flows to accrue to remaining shareholders.
Genworth Financial will report Q1 earnings on April 30, 2013, after the market close. Management will also provide an update on the strategic priorities outlined previously, including the quarantine of the US mortgage insurance business into its own operating entity, the minority IPO of the Australian mortgage insurance business and value the maximization plan and sale of the international protection business.