Genworth Financial (GNW) is a company that has been wrapped up in regulatory approvals from 2016 to March of this year regarding its pending sale to China Oceanwide (OTC:HHRBF). Earlier this year, with all the regulatory approvals in place, it seems like Hony put the deal on ice. Now we know:

Oceanwide has reached a general agreement with Hony Capital on the key commercial terms and conditions of its $1.8 billion offshore financing plan to complete the acquisition of Genworth.

To me, that implies that the deal is effectively complete. Yet, the stock trades at $3.50 as I write this, and the deal price is 55% higher at $5.43.

Investment Thesis

This deal has taken four years longer than people thought it might when it was originally agreed to in 2016. Now, it is not closing because China Oceanwide and Hony Capital want to have face-to-face meetings. The CEO of Genworth said the following, excerpted out of an email posted below in its entirety to Genworth staff, to explain the justification behind this delay: “business culture across Asia prioritizes relationships and the face-to-face interactions that make for clear communication and understanding.” In that spirit, there appear to be one or two 14-day quarantines between now and a successful deal close, and a national week-long holiday called the Chinese Mid-Autumn festival. Genworth will be updating shareholders as to how things went at the first face-to-face meeting October 31, 2020. Given that China Oceanwide and Hony Capital have come to a general agreement, they simply need to reach a final agreement for this deal to go through. This is something they want to do in person, and so, it is reasonable to expect a 55% return to the buyout price of $5.43 by the end of November.

Analyzing The Press Release

China is currently in the midst of the Mid-Autumn festival that ends on Thursday, October 8, 2020. Both Hong Kong and Mainland China require mandatory 14-day quarantines upon entering, which is the reason behind this 2- month extension. After the festival, China Oceanwide or Hony Capital employees can be expected to sit in a 14-day quarantine. That means the soonest that the two companies can sit face to face is roughly October 23. The parties then have roughly a week to finalize the funding agreement and provide Genworth an update:

The parties also agreed to an interim checkpoint on October 31, 2020, by which time Oceanwide needs to provide Genworth with satisfactory evidence that the necessary funding will be available to close the transaction by November 30.

Thus, we can expect to hear from Genworth regarding the status of if the financing agreement is in place by November 1. Note that the funding agreement is between Hony Capital and China Oceanwide. In 2009, China Oceanwide bought 29% of Legend Holdings, which wholly owns Hony Capital.

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Related Transaction – Cues

There is an Oceanwide Center sale in San Francisco where China Oceanwide is selling a $1 billion building, Oceanwide Center, to Hony Capital. This deal was also scheduled to close around September 30th, as was the Genworth acquisition. What is most interesting to me is the terms of the $1 billion building acquisition:

The restructured deal includes a $700 million payment upon closing and up to $500 million three years later, depending on the development’s financial performance.

In other words, it’s not really $1 billion. It’s $700-1200 million. Although I’ve heard that this transaction does not impact the Genworth transaction, the fact that they both were scheduled to close at the end of September and both have been extended is illuminating. My guess is that the Genworth acquisition framework is also possibly no longer a straight $1.8 billion from Hony Capital.

Instead, given the restructured deal of the Oceanwide center, it makes sense to me to hypothetically propose some sort of $1.8 billion initially where there are performance strings attached moving forward, along with payment terms between Hony Capital and China Oceanwide to offload some transactional risk most likely from Hony Capital to China Oceanwide in the Genworth acquisition.

My guess is that this is why the two companies want to meet face to face, to iron out all of these details and get both deals across the finish line.

Context Commentary From Leadership

Both Lu Zhiqiang, chairman of Oceanwide, and Tom McInerney, CEO of Genworth, provided their summary notes on this transactions progress in the most recent press release. The chairman of Oceanwide confirmed the need to have face-to-face communications to finalize the remaining steps to secure the financing and successfully close this transaction:

We have overcome many hurdles during the past four years, demonstrating time and again our unwavering commitment to this transaction. The COVID-19 pandemic has presented a unique set of challenges to deal-making that traditionally relies on face-to-face communications, which is why the additional time is necessary to finalize these remaining steps. Despite these latest challenges, we remain committed to securing financing for the transaction in order to close the transaction as soon as possible.

The Genworth Financial CEO points out a similar narrative that the COVID-19 pandemic quarantine restrictions are what is to be blamed for slowing down the close of the transaction:

As we extend the waiver and agreement again, it is important to remember that it wasn’t until the end of March 2020 that we received substantially all the regulatory approvals needed to close the transaction. That put Oceanwide in the difficult position of completing the funding process in the middle of a global pandemic. I recognize that this has been an extraordinarily long road to travel for our shareholders, regulators, employees and other stakeholders, and we greatly appreciate their patience. We are committed to continuing to work with Oceanwide to close the transaction because we believe that the transaction represents the best value for Genworth’s shareholders.

Needless to say, this all adds up. I think this is the last timeline extension.

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Post-Funding Steps

After the funding is secured, a few perfunctory steps remain as part of finalizing this transaction:

The transaction had previously received all U.S. regulatory approvals needed to close the transaction, subject to confirmation from the Delaware Department of Insurance that the acquisition of Genworth’s Delaware-domiciled insurer may proceed under the existing approval. The parties also are still in discussions with the GSEs about their previous approval of the transaction, and Oceanwide needs to receive clearance for currency conversion and transfer of funds from SAFE. With respect to other regulatory matters: FINRA has confirmed that the transaction may close under FINRA Rule 1017(C) prior to receiving its final approval and the North Carolina Department of Insurance issued a 90-day extension of its previously granted approval on August 11, 2020. All other required approvals and clearances have been secured.

These remaining approvals and steps are minor compared to the multi-year long saga of steps taken to make this purchase of Genworth Financial by China Oceanwide a reality. The deal now has two months for something that should take less than that to complete. While it would be amazing to you and me that the companies in China are forcing their employees and staff to sit through two-week quarantines so that they can all see each other to get this deal done, this is apparently simply how business is done in China. And so, we are basically left standing on the finish line waiting for a Chinese ritual to complete, much like a wedding ceremony, so that the deal can be consummated.

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Summary and Conclusion

And so, there you have it. The only remaining outstanding major issue was funding. Hony Capital and China Oceanwide have reached a general agreement there. To me, that is the biggest part of this story. Coronavirus not only put the deal on ice since March of this year, but has also slowed down the closing process due to the need for face-to-face meetings, presumably to iron out just the Genworth acquisition but also possibly the building acquisition simultaneously. If you ask me, nothing ever really happens in isolation, and I can see how you might forego meeting face to face in preference for a Zoom meeting over VOIP to do one deal, but it looks to me like you have two related parties working hard to make two $1 billion+ deals happen in a way where they both stand to make money.

Thus, the steps to finalize this agreement require in-person meetings, and mandatory quarantine procedures have forced the companies to delay the closing of this transaction, which will reward current Genworth shareholders at current prices with a 55% return in 2 months.

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.



Via SeekingAlpha.com