Canadian MI sale could force new review of Genworth's M&A deal

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Genworth Financial identified three options for the disposition of its Canadian mortgage insurance unit. However, that deal could require a revisiting of some U.S. regulators' approval of the parent company's sale to China Oceanwide.

Those options include a privately negotiated sale of Genworth Financial's 57% state in the publically traded Canadian subsidiary, the sale of that stake on the open market, or a sale of the stake with the acquirer purchasing the remaining 43% owned by others in a coordinated transaction, said Tom McInerney, Genworth's president and CEO, during the company's second quarter conference call.

Selling the shares on the open market would bring in lower proceeds — it would likely be at a discount than the current price — than a privately negotiated sale or a whole sale to another entity, McInerney said. However, an open market sale of the 57% stake would be a quicker process and it should not need a change of control approval by Canadian regulators.

"The approvals were based on the original transaction summary and that did not contemplate the potential sale of our Canadian business. So the regulators will have to — if we reach a definitive agreement, we'll submit that, they'll have to evaluate that," McInerney said. But Genworth has a good relationship with those regulators, he continued, and they understand the company's situation.

Each regulator would have to make its own judgment on if the Canadian MI sale is a material change to the transaction which would require a new full review of the deal, McInerney said. He doesn't expect the Committee on Foreign Investment in the U.S. would want to relook at the deal, because its concerns were on national security around the company's data and not on the economics of the transaction.

The U.S. mortgage insurance unit generated adjusted operating earnings of $147 million in the second quarter, the highest since the company conducted its initial public offering in 2004. In the first quarter, the unit produced adjusted operating income of $124 million, and in the second quarter last year, it was $137 million.

New insurance written during the quarter was $15.8 billion, compared with $9.6 billion in the first quarter and $11.4 billion in the second quarter of 2018. That tops MGIC's second-quarter NIW of $14.9 billion.

The overall purchase and refinance market rising due to an increase in low down payment mortgages, an estimated rise in market share with the continued roll-out of Genworth's proprietary risk-based pricing engine and its selective participation in forward commitment transactions caused the year-over-year improvement.

If and when completed, the proceeds from the sale of the Canadian unit will be used as an additional source of funds to meet the parent company's upcoming debt maturities, said Chief Financial Officer Kelly Groh during the call. That is in addition to the $1.5 billion capital investment China Oceanwide will make in Genworth after the deal is completed.

Genworth Financial — which besides the U.S. mortgage insurance business and stakes in Canadian and Australian MI units also has a life insurance business — reported net income of $168 million for the quarter, down from $190 million one year prior.

BTIG is keeping its rating on Genworth as neutral, with questions remaining about whether the deal with China Oceanwide gets completed.

"While the company's stock is trading more than 25% below the deal price of $5.43 per share, we believe its downside if the merger is not completed is at least as large," said BTIG analyst Mark Palmer in a report issued following the call. "As such, we believe Genworth's risk/reward proposition is unattractive on both the long and short sides of the trade."

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