Will The Genworth Financial - China Oceanwide Deal Go Through?

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About: Genworth Financial, Inc. (GNW)
by: Chris Lau
Summary

Skepticism over the China Oceanwide-Genworth merger deal grew in the last few weeks.

In the last two years, the stock touched the $5.00 level only to fall.

Deal deadline is Friday, March 15.

Genworth Financial (GNW) touched the $5.00 level but never managed to break above it since late 2016. In that time, shareholders waited once again for developments on its merger with China Oceanwide. Yet while the eighth waiver and agreement extend the deadline to the end of this week - March 15, 2019 - the firms do not have clearance in China. In effect, Genworth is a sad tale reminding investors that government regulators are a headwind when it comes to realizing shareholder value.

Genworth Financial (NYSE:<a href='https://seekingalpha.com/symbol/GNW' title='Genworth Financial, Inc.'>GNW</a>)

Two Years of Waiting May End

After over two years since China Oceanwide said it would buy Genworth for $5.43, that wait may come to an end on March 15. In the years it took for the companies to wait for approval, Genworth grew its business in the solid double-digit rate by revenue. The bad news for shareholders is that it did not negotiate a better selling price. Even more disturbing is how fast the stock fell since the start of the year, ahead of the extended deadline date. GNW stock topped $5.00 in January, only to fall ~23% year-to-date.

At a recent stock price of $3.60, which is 7.5% lower than where it was the week before, markets are clearly skeptical that Oceanwide and Genworth will not close the deal.

Strong Fourth-Quarter Revenue Growth

Genworth issued a mixed fourth-quarter report. Revenue grew 18.9% to $2.01 billion but it lost $0.58 a share (non-GAAP), or -$0.66 GAAP EPS. Fixated on the extended deadline and selling down shares instead, investors ignored the capital levels being above management targets. Its U.S. MI PMIERs Sufficient Ratio stood at 129%, $750 million above the current requirement. Conversely, after-tax LTC reserves increased $258 million, due to changes to the benefit utilization rate and claim termination rate.

The $400 million in incremental annual premium increases in the year is a positive development. LTC and life insurance reserves rose for the year.

In the table below, the $425 million loss in U.S. Life Insurance led to an overall adjusted negative operating income:

(Amounts in millions)

Q4 18

Q3 18

Q4 17

U.S. Mortgage Insurance

$

124

$

118

$

74

Canada Mortgage Insurance

48

44

43

Australia Mortgage Insurance

18

17

-125

U.S. Life Insurance

-425

-3

-69

Runoff

-2

14

13

Corporate and Other

-54

-45

390

Total Adjusted Operating Income (Loss)

$

-291

$

145

$

`

Source: Genworth Financial

The Long Term Care Insurance unit lost $314 million due to higher LTC reserves of around $327 million. This resulted in an after-tax charge to earnings $258 million.

Despite the overall loss, the loss ratio for U.S. mortgage insurance improved, declining to 7%, down from 22% last year. Canada MI's operating income was $48 million, but the loss ratio double to 18% from last year, due to higher average reserves on delinquencies in Alberta.

Deal Update

The market has all of its attention turned to the likelihood of Genworth and Oceanwide closing its deal. In its Q4 press release, Genworth said it received all the U.S. approvals. The bad news is that due to the Chinese New Year/Spring Festival holiday, the two firms agreed to extend the merger agreement deadline to March 15.

The company said at the time that it still needed the receipt of regulatory approvals in Canada and the U.S. Financial Industry Regulatory Authority ("FINRA"). It also needed China's clearance for currency conversion and the transfer of funds.

Canada-China Relations Sour

Ever since Canada detained Huawei's CFO, Meng Wanzhou in late-January, relations between the two countries worsened. Canada may cite concerns of data security and national security as grounds to delay the approval of the deal. And on Feb. 25, when a subsidiary of China Oceanwide's auditor resigned, it only added to the fear that the deal would be less and less likely.

Your Takeaway

Only a few days remain before the deal expires. Despite the low odds that the firms receive approvals, speculators may want to bet on the stock rallying ahead of the expiry. If the companies extend the deadline again, the stock may still hold the $3.20 - $4.00 level for the next few months. And if the deal is called off, Genworth's improving business might be enough to get the stock to at least above the $4.00 level. In the least likely scenario where the deal is completed, speculators get $2.00 a share and may sell the stock at $5.43.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.