Please ensure Javascript is enabled for purposes of website accessibility

Why Genworth Financial, Inc. Shares Were Rocked to the Tune of a 13% Loss

By Sean Williams - Oct 2, 2017 at 5:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Genworth is hit by yet another regulatory delay in its attempt to be acquired by China Oceanwide Holdings.

What happened

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.

So what

According to the press releases from the companies, they've withdrawn their voluntary notice with the CFIUS with "an intent to refile the transaction with additional mitigation approaches, including potentially working with a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. 

A frustrated investor grasping his head in front of his computer screens.

Image source: Getty Images.

This marks the third such occasion that Genworth and China Oceanwide have withdrawn and refiled their application with the CFIUS.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.

Now what

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Genworth Financial, Inc. Stock Quote
Genworth Financial, Inc.
$3.64 (3.12%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.