Roanoke Times (Roanoke, VA) November 19, 2018
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, 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 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 make its promised contribution
of $1.5 billion 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.
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