As Genworth pushes toward merger completion, one report questions viability of the $2.7 billion deal
November 22, 2018 by John Reid Blackwell
More than two years after the deal was announced, the proposed acquisition of Henrico County-based insurance giant Genworth Financial Inc. by a China-based financial conglomerate finally may be nearing completion.
Genworth, a seller of mortgage and long-term care insurance with thousands of employees in Virginia, has said it hopes to clear the final regulatory hurdles by the end of the year for its long-delayed acquisition by China Oceanwide Holdings Group Co. Ltd.
As the proposed merger nears a key public hearing, however, a report by one investor has raised questions about the viability of the deal and prompted an online debate.
The report, published on Nov. 1 by Hindenburg Research, based in New York, argues that the proposed $2.7 billion acquisition ultimately will not pass scrutiny by state regulators because China Oceanwide has taken on “unsustainable” debt, is facing a liquidity crunch and is pledging equity in its assets for loans, raising concerns that the merger ultimately would be bad for Genworth’s U.S. policyholders.
“This would make the deal incredibly dangerous for U.S. policyholders given the cross-border enforcement issues between the U.S. and China,” according to the report by Nathan Anderson, founder of Hindenburg Research. “The dynamic would make it virtually impossible for regulators to approve what looks to be a disaster in the making.”
Hindenburg Research acknowledged it has taken a significant short position on Genworth’s stock, meaning it has made financial bets that the deal will fail and Genworth’s stock value will decline.
Genworth declined to comment on the details of the report, but suggested that Hindenburg’s short position makes its analysis unreliable.
“We do not, as a matter of policy, comment on reports published by individuals, such as short sellers, to benefit their financial self-interests,” the company said.
A report published online on Nov. 2 by Seven Corners Capital Management, a New York-based investment firm, also disputed the Hindenburg analysis and argued that the deal is likely to be approved by regulators.
Genworth first announced in October 2016 that it had agreed to be acquired by China Oceanwide for $5.43 per share in cash.
Genworth, a Fortune 500 company, would become a subsidiary of China Oceanwide under the deal. The company’s shareholders approved the acquisition in March 2017, but completion of the merger has since been delayed multiple times because of federal, state and international regulatory reviews.
A key regulatory hurdle was cleared in June when the acquisition was approved by the Committee on Foreign Investment in the United States, or CFIUS, a joint committee of federal government agencies that reviews acquisitions of U.S. firms by foreign entities for national security concerns.
In its report, Seven Corners Capital Management said the CFIUS approval was important because many market observers thought the federal review could imperil the deal. To win approval from CFIUS, Genworth agreed to use a U.S.-based third-party service provider to manage and protect the data of its U.S. policyholders.
The Hindenburg report, however, called the CFIUS approval a “meaningless milestone” because it focused on national security issues rather than financial issues.
The acquisition still needs approval from two government agencies in China and from regulators in Australia and Canada. In the U.S., it needs approval from Fannie Mae and Freddie Mac, and from state insurance regulators in New York and Delaware.
Regulators in North Carolina and Virginia have approved the deal once before, but they need to do so again because the companies subsequently changed the capital structure of the merger agreement.
The original funding plan and the new alternative one have Lu Zhiqiang, the chairman of China Oceanwide of Beijing who has been listed by Forbes magazine as one of China’s richest businessmen, providing 100 percent of the $2.7 billion in funds to buy Genworth, according to documents filed with the State Corporation Commission. The difference between the two plans is where the money comes from; the original funding structure had all of the money coming from China-based entities, while the alternative calls for about 35 percent of the equity funding coming from China businesses.
The Delaware Department of Insurance has scheduled a public hearing on the proposed acquisition of Genworth Life Insurance Co., which is domiciled in Delaware, for 9 a.m. Nov. 28. in Dover, Del. The department also is taking written comments on the proposed acquisition through Wednesday.
“The scheduling of the hearing with Delaware is a significant milestone in our regulatory review process and a major step towards closing the transaction with Oceanwide,” said Thomas McInerney, president and CEO of Genworth, in the company’s third-quarter earnings report on Oct. 30. “Given the timing of the hearing and subsequent expected review period, we are targeting closing the transaction by year-end.”
The Hindenburg report cites audit statements on China Oceanwide it obtained from state regulators indicating that the company has had “consistently negative” operating and investing cash flow over the past five years and has been supporting itself with financing activities, pushing its total debt load from $8.9 billion in 2013 to more than $31 billion in 2017.
“We see no chance of regulators approving this deal,” the report says. “Doing so would hand control of Genworth’s assets to a faltering entity in a jurisdiction with limited recourse.”
A follow-up report by Hindenburg on Nov. 9 argued that China Oceanwide has overextended itself with real estate investments and development in the U.S., including a skyscraper development in San Francisco estimated to cost $1.6 billion. The report argues that, given its debt load, the company is unlikely to be able to make its promised contribution of $1.5 billion in capital to Genworth over time, an infusion of cash to give Genworth the flexibility to pay off debt maturing in 2020 and 2021.
Anderson, the Hindenburg founder who authored the reports, said he spent several months researching the deal.
“I don’t see China Oceanwide surviving as a conglomerate for long regardless of whether the deal goes through,” he said.
The rebuttal published online by Seven Corners Capital disputes that, also pointing to audit reports showing that China Oceanwide’s balance sheet is healthy, with more than $29 billion in current assets as of the end of 2017 and $10 billion in working capital.
Seven Corners said it gives the acquisition a 90 percent chance of getting regulatory approval.
“Given that [Genworth’s] management has apparently been in close contact with the Delaware Department of Insurance … we seriously doubt that Delaware would proceed to schedule a Nov. 28 hearing if there was any real possibility that the merger would not be approved,” the Seven Corners report says.
jblackwell@timesdispatch.com
(804) 775-8123
