A compelling opportunity explained
TWO WAYS TO WIN FOR SGF
Genworth Financial is one of the key holdings of SGF - here is why we believe this investment opportunity is so compelling
One interesting idea SGF owns is Genworth Financial, Inc. (NYSE: GNW) in the US which is a very interesting situation.
Genworth is a leading Fortune 500 insurance holding company committed to helping families achieve the dream of homeownership and address the financial challenges of aging through its leadership positions in mortgage insurance and long term care insurance. Headquartered in Richmond, Virginia, Genworth traces its roots back to 1871 and became a public company in 2004.
Genworth used to be a huge company but it is now much smaller. It is currently subject to a takeover offer from a Chinese group. The shares currently trade just under $3, about $2.85. There’s a takeover offer on the table for $5.40, so upside should the deal close is close to 80%. There are two ways to win with this situation. With the Trump administration voicing a very anti-China position, the price of Genworth reflects the fact that the market does not think this takeover will close. In addition, the takeover has been hanging around for about a year. When the takeover bid was initially made it was only a 5-10% premium to where the stock was trading. The stock is now down by half since then. At the same time, comparable businesses in the US have risen about 40% over that time period.
The market is expecting that the Trump administration will block this deal because it’s a Chinese bidder and we have seen the Trump administration block a lot of Chinese deals since Trump came to office. SGF reviewed all of these transactions one by one and the common theme to the transactions that were blocked was there was some form of national security issue or potentially serious consumer privacy issues.
What’s interesting with Genworth is they’ve amended their proposal to the regulators proposing that a third party looks after all of the consumer's private data. On the one hand, SGF believes that there is a good chance (say, 60%) that the transaction will close, and the Fund will generate a gain of 80%.
What’s really interesting though, what happens if the takeover fails?
Our general view on situations like betting on takeovers is it’s a very bad idea, you need very specialised knowledge, such as having US M&A lawyers on staff.
However, what’s really interesting here is that after the takeover bid was announced, long term holders of the stock sold. The company will soon not be listed so why would long term holders own it?
So as a result, the current stock price is trading at about 2.8x times earnings. A P/E of 2.8 for a good business is an incredibly rare situation. The market capitalisation is about $1.5 billion dollars, so on a sum of the parts basis we get a valuation of about $8, so should the deal not proceed and the company stays listed, SGF believes that there is huge upside. Our ideal situation would be the takeover bid actually falls away and we think the shares are worth around about $8 to $11 relative to a current price of under $3. Should the takeover go through we make 80%. It is a classic heads, we win, tails, we also win.