GNW - Genworth Financial

[johnpane]

Seems to be falling off a cliff. Anyone still in this? I don't think much has changed from the initial thesis.

 

If you think this stock is worth more than 10% of its book value (excluding AOCI) of $20+, there is a rare opportunity here. You can sell Jan18 4 PUTs and buy an equal number of shares with the proceeds. Two things could happen: 1) You are forced to buy shares at $4, making your average cost $2; or 2) the PUTs expire worthless and your GNW shares are free. The latter seems far more likely.

[gurpaul88]

http://www.marketwatch.com/story/genworth-separating-struggling-long-term-care-unit-2016-02-04

[jmp8822]

Does anyone want to take a stab at what they think GNW is worth in 2017?  It is tough to picture LTC being separated from the rest of the business, but it might be a massive value unlock considering the mortgage insurance businesses are worth substantial sums.  I'm considering a 2018 option spread on GNW given the high uncertainty, with a chance of 4x from here at $2.

[intothebreach]

For those interested, there are a few very good articles that have been written on GNW on SeekingAlpha. It's been pointed out before but PlanMaestro's (fellow poster on CoBF, mostly inactive nowadays unless I'm mistaken) twitter feed has highlighted GNW quite a few times. And Booth-Laird have posted their analysis on their site as well.

 

As a side note not directly related buy applicable to GNW in this case, I find myself increasingly using SA not necessarily for the posts themselves (usually night and day in quality compared with most of CoBF), but rather as a way to 1) establish what the "consensus" view seems to be from the comments section, and especially 2) because, even thought they are few and far between, some commenters understand the stock much better that the original poster and usually add some value to my understanding of the investment opportunity.

 

As you probably have guessed, I'm long GNW (fairly small position through stock and short long-dated puts following john pane's suggestion from his January post).

[Patmo]

Is anybody still following this company? They stringed together a couple good quarters and appear optimistic about getting regulatory approval on their plans. It looks like investors are starting to come back.

[intothebreach]

Yes, still invested and following GNW. New management appears to be proactively managing their LTC situation through securing rate increase with regulators, and they also expect unstacking (to use their term) of the LTC unit to occur, albeit regulators seem to prefer a gradual uncoupling rather than a one-time. Still very much of a black box, but the discount to book value seems exaggerated (at least to me).

[johnpane]

Is anybody still following this company?

 

I am, and enjoying the remarkable trend the past few weeks. Upward, for a change!

 

[marcowelby]

For those who follow the stock

 

Genworth and China Oceanwide Sign $2.7B Acquisition Deal

 

http://web.tmxmoney.com/article.php?newsid=7180170523767168&qm_symbol=GNW:US

 

but I do not quite understand why the stock is sliding to $4.79 when Oceanwide is offering $5.43!!

 

Marc

[fareastwarriors]

For those who follow the stock

 

Genworth and China Oceanwide Sign $2.7B Acquisition Deal

 

http://web.tmxmoney.com/article.php?newsid=7180170523767168&qm_symbol=GNW:US

 

but I do not quite understand why the stock is sliding to $4.79 when Oceanwide is offering $5.43!!

 

Marc

 

regulatory issues?

[fareastwarriors]

For those who follow the stock

 

Genworth and China Oceanwide Sign $2.7B Acquisition Deal

 

http://web.tmxmoney.com/article.php?newsid=7180170523767168&qm_symbol=GNW:US

 

but I do not quite understand why the stock is sliding to $4.79 when Oceanwide is offering $5.43!!

 

Marc

 

regulatory issues?

 

 

Genworth, China Oceanwide Chart Path to Regulatory Approval of Deal

 

Genworth Financial Inc.’s proposed buyout by a Chinese conglomerate drew skepticism in the market that the deal would get done

http://www.wsj.com/articles/genworth-china-oceanwide-chart-path-to-regulatory-approval-of-deal-1477348819

[Patmo]

As it stands, this business is becoming more interesting as an investment.  Share price continues staying depressed while expected closing date of the deal looms ever closer. If it closes in the expected time frame, you can get a 60% return in 6 months, and if it doesn't, you get a struggling business that was trading at roughly the transaction price before it was announced. I've had a lot of success with buying struggling businesses that get bought out by Chinese investors on the cheap, wouldn't mind continuing the streak.

[gurpaul88]

What do you think of the odds that Oceanwide reduces its offer? Might be the reason for the fall today:

 

http://seekingalpha.com/news/3237662-wells-fargo-china-oceanwide-likely-cut-genworth-offer-3_43-share

[AzCactus]

That's interesting.  I wonder what implications there might be based on earnings.  Obviously at $3.43/share the opportunity virtually disappears (from an arbitrage aspect) and at $5.43 its huge. 

[Patmo]

What do you think of the odds that Oceanwide reduces its offer? Might be the reason for the fall today:

 

http://seekingalpha.com/news/3237662-wells-fargo-china-oceanwide-likely-cut-genworth-offer-3_43-share

 

Pure speculation, also there isn't a shareholder in the world that would approve this offer. And to top it off, let's say they do. You end up flat.

[Patmo]

The official offer is already a real tough sell on its own, too

[oddballstocks]

This is a crazy situation, I've continued to add.  Price is falling with no end in sight.

 

Blackrock sold out of their position.  Yesterday WFC releases a weird revision based on the proxy financials.  Yet China Oceanwide had seen the financial projections when they made the offer.  And at the same time the company releases a PR saying the day is still on, everything going according to plan with an expected close in Mid-2017.

 

Is Wells wrong?  Does someone know something?  It's just crazy.

 

I'm not a conspiracy theorist, but there are a lot of strange moving parts.  If you go on Seeking Alpha there are people posting hundreds of comments bashing the deal saying the company will be going under regardless etc.

 

I don't know what to make of it.

[DavidVY]

I cant make heads or tails of this company at all.

 

I owned it for a bit and sold at a loss

 

It looks beautiful in theory but holy fk the price movement is riduclous

[glorysk87]

As it stands, this business is becoming more interesting as an investment.  Share price continues staying depressed while expected closing date of the deal looms ever closer. If it closes in the expected time frame, you can get a 60% return in 6 months, and if it doesn't, you get a struggling business that was trading at roughly the transaction price before it was announced. I've had a lot of success with buying struggling businesses that get bought out by Chinese investors on the cheap, wouldn't mind continuing the streak.

 

I don't understand this line of thought.  The only question you should be asking yourself here is "What information do I have about the deal that the market doesn't have?"  Otherwise, this investment thesis is predicated purely on luck.

[hillfronter83]

As it stands, this business is becoming more interesting as an investment.  Share price continues staying depressed while expected closing date of the deal looms ever closer. If it closes in the expected time frame, you can get a 60% return in 6 months, and if it doesn't, you get a struggling business that was trading at roughly the transaction price before it was announced. I've had a lot of success with buying struggling businesses that get bought out by Chinese investors on the cheap, wouldn't mind continuing the streak.

 

I don't understand this line of thought.  The only question you should be asking yourself here is "What information do I have about the deal that the market doesn't have?"  Otherwise, this investment thesis is predicated purely on luck.

 

Market routinely discounts many Chinese involved deals, some rightly so. However, the acquirer for this deal is one of the most powerful private held company in China and it put up $200m termination fee in escort, which is not contingent on Chinese regulatory approval. It tells me that the acquirer is very confident of deal closing. It is similar to an earlier deal for IM where the spread was over 3% just a few days before the deal close. I think at close to 60% spread, I'm willing to bet with a small position.

[morningstar]

As it stands, this business is becoming more interesting as an investment.  Share price continues staying depressed while expected closing date of the deal looms ever closer. If it closes in the expected time frame, you can get a 60% return in 6 months, and if it doesn't, you get a struggling business that was trading at roughly the transaction price before it was announced. I've had a lot of success with buying struggling businesses that get bought out by Chinese investors on the cheap, wouldn't mind continuing the streak.

 

The transaction was announced together with earnings that, on their own, would have seen the stock fall probably 80%, hence why the stock was down ~20% on the acquisition announcement.

 

I think the deal is pretty likely to close, but the downside risk in the event of failure to close is enormous. Which is why shareholders would still likely approve the deal if Oceanwide cuts the price to the equity, in order to provide more cash onto the balance sheet (to be transferred to GLIC in exchange for unstacking the GLAIC entity). Cutting $1bn off the purchase price like in the WFC report seems like a big number, but it wouldn't surprise me if they need to find $200-300m to appease Delaware regulators.

[johnpane]

This is a crazy situation, I've continued to add.  Price is falling with no end in sight.

 

Blackrock sold out of their position. 

 

Blackrock did not sell out of their position. Earlier this week they filed a 13G indicating they owned 9.4% of the shares effective 12/31/16, down from 9.6% on 12/31/15.

 

https://www.sec.gov/Archives/edgar/data/1276520/000035348017000711/genworth.financial.txt

https://www.sec.gov/Archives/edgar/data/1276520/000021545716002831/genworth.financial.2015.txt

 

Yesterday WFC releases a weird revision based on the proxy financials.  Yet China Oceanwide had seen the financial projections when they made the offer.  And at the same time the company releases a PR saying the day is still on, everything going according to plan with an expected close in Mid-2017.

 

If someone has a copy of the actual Wells Fargo report, please send. All I have to go on is what Seeking Alpha's Jason Aykock reported. He implies Dargan's prediction is based on "... China Oceanwide could cut price after seeing an expected 2016 loss of $0.41/share vs. estimates for a $0.04 gain."

 

The merger agreement seems to explicitly say that failing to meet a forecast or estimate is not a Company Material Adverse Effect. No Company Material Adverse Effect is a condition of the merger. [section 7.2(e)] (Failure to meet a condition would enable China Oceanwide to cancel the merger -- the ability to change the offer price is not mentioned anywhere in the agreement as far as I have been able determine.)

 

Company Material Adverse Effect "means (x) any material adverse effect on the financial condition; properties, assets and liabilities (considered

together); business; or results of operations of the Company and its Subsidiaries, taken as a whole, or (y) ... provided, however that, in the case of clause (x) above, none of the following, and no facts, events, changes, developments, circumstances or effects (each, an “ Effect”) arising out of the following, shall constitute or be taken into account in determining whether there has been a “Company Material Adverse Effect”:

...

(G) any failure by the Company to meet any forecasts, estimates or representations of revenues, premiums, expenses, earnings or other financial

performance or results of operations for any period prior to the Closing; provided that the exception in this clause shall not prevent or otherwise affect a

determination that any Effect (not otherwise excepted under this definition) underlying such failure has resulted in, or contributed to, a Company Material

Adverse Effect;

..." [excerpted from Section 10]

 

 

In my view, there are more likely risks that the merger would be cancelled (e.g., failure to unstack or failure to get government approvals), but in any case the mechanism to change the offer price would seem to be to cancel based on failure to meet a condition (or pay the termination fee)  and then make a new offer instead of walking away.

[johnpane]

A relevant analysis has just been posted on Seeking Alpha: http://seekingalpha.com/article/4041046-genworth-china-oceanwide-deal-really-risk

 

[Patmo]

Bad article man, the author should really ask themself whether this $3.47 analyst has insider info ...................................................

 

Seriously though, pretty good read. One of the more important things pointed out in my opinion is that they structured their deal in as regulator-friendly fashion as they reasonably could. Many people to please though, we will see what happens

[valcont]

I looked at this stock last year but it went in "too hard" pile since I couldn't figure out the LTC sub. That's the elephant in the room and the market is assigning negative equity to that. This article just scratch the surface by just canceling out the $283m of reserve charge with the termination fees. As far as I remember , the market was concerned with the high discount rate that they were applying with fifth of the portfolio due in short term which would amount to much higher reserve requirement than the estimated $300m. How do you guys get comfortable with that in case the deal fell apart?

 

 

[johnpane]

Is anyone still watching this situation?

 

The deal has been in regulatory limbo and the stock was recently languishing at about 2.70, or half of the buyout price.

 

China Oceanwide has stuck with this deal despite numerous opportunities to back out. GNW has not reported any major financial disasters while this deal has been pending, continues to mitigate LTC issues with premium increases, and successfully refinanced debt due this month.

 

In the past few weeks, two things have happened that signal increased probability the deal will close in the coming months.

1) CFIUS offered an expedited process for the processing of a refiled "joint voluntary notice", which has provisions to protect U.S. consumer data (seemingly, the only reason CFIUS could reject this merger on national security grounds, which is its purpose after all). (April 24 Press Release)

2) China Oceanwide agreed to close the deal without "unstacking" GLAIC as a subsidiary of GLIC. The unstacking was a major sticking point for gaining approval of Delaware regulators. (Revealed during earnings call, May 2 [strange this wasn't mentioned in the earnings press release])

 

Last week when #2 was announced the stock was volatile but ended the day little changed. It subsequently has been creeping up.

 

Yesterday's closing price of $3.14 implies a 58% probability of closing IF the company is worth zero with a deal failure. Both these estimates (probability of closing and the standalone value of GNW) seem pessimistic.

 

Here is one thought process on GNW as a going concern:

• Assume the holding company never gets dividends or other value from GLIC and its subsidiaries. That part of the company is worthless to shareholders.

• Shareholders are left with the mortgage subsidiaries and holding company cash and debt. This is $2.1B in equity or $4.23 per share.

• The big risk here is the ability to refinance debt next due in 2020, or poor ratings (or other factors) hindering the MI business.

• Bankruptcy may be a long-term possibility but there is a lot of time available to take evasive actions, even if it means liquidating.

This seems like it's worth something more than zero. I think $2 per share, less than half of book value, may be a reasonable value to ascribe.

 

As for the probability of deal closure, I'd put it closer to 80%.

 

Combine the two (0.8*5.43 + 0.2*2) and you get an expected value of $4.74, 50% upside from yesterday's close. Of course, the actual result is binary, either 73% gain (exact) or 37% loss (estimated).

 

I'm very interested to hear others' input on this.