Shares of Genworth Financial (GNW 3.12%), one of the largest players in long-term care insurance, shed 13% of its value during Monday's trading session after it and its potential acquirer, China Oceanwide Holdings, provided an update on its application with the Committee on Foreign Investment in the United States (CFIUS). As you can surmise by the move lower, concerns are again manifesting about whether this buyout will go through.
According to the press releases from the companies, they've withdrawn their voluntary notice with the CFIUS with "an intent to refile the transaction with additional mitigation approaches, including potentially working with a U.S. third-party service provider." The CFIUS is a regulatory agency that scrutinizes the acquisition of U.S. companies by foreign entities, and despite Genworth's shareholders approving the $2.7 billion merger back in March and China Oceanwide announcing plans to buy Genworth Financial back in October 2016, regulatory hurdles have proven thus far insurmountable for both companies.
This marks the third such occasion that Genworth and China Oceanwide have withdrawn and refiled their application with the CFIUS. Doing so will give the regulatory body more time to review the merger and ask questions, with the ultimate goal of getting a green light to complete the transaction. The downside is that the refiling delays the review process for an additional 30 days and possibly an additional 45 days.
Also, Tom McInerney, the president and CEO of Genworth said:
At the same time, we are evaluating options to address our upcoming debt maturities and preserve the value of our businesses in the event the transaction with Oceanwide cannot be completed. We have approximately $600 million of debt that matures in May 2018, with no additional maturities until 2020. Options to address the 2018 debt maturity in the absence of a transaction with Oceanside include potential refinancing alternatives, current holding company cash, and/or potential asset sales.
The heart of the issue is that Genworth could genuinely struggle to raise the capital needed to cover its May 2018 debt maturity if this deal falls through. On the other hand, if the deal does go through, there could be a sizable arbitrage opportunity available.
Which side is right? No one is exactly certain, especially with the duo having to refile their CFIUS application for a third time. Genworth Financial's shareholders will need an answer relatively soon with the clock ticking on its debt repayment, which means the possibility of further weakness in the very near term until we get more clarity.
While I am leaning toward the belief that the deal should eventually be approved, I wouldn't suggest any investors, other than those with an exceptionally high tolerance for risk, consider this arbitrage opportunity. If the deal doesn't go through, there are no guarantees Genworth has the financial means to survive.