While the long-delayed merger between Genworth Financial Inc. and China Oceanwide Holdings Group Co. Ltd. has now cleared a major barrier, it will have to overcome what could be a much more daunting obstacle.
The deal, which was announced in October 2016, recently received approval from the Committee on Foreign Investment in the U.S., or CFIUS. But the merger's biggest stumbling block may be Delaware Insurance Commissioner Trinidad Navarro, who has taken a hard line against the merger.
CFRA equity analyst Cathy Seifert said that Navarro and his department are likely to scrutinize the strength of Genworth's reserves and its annuity book of business before signing off on the deal, despite CFIUS approval.
"This was obviously a significant hurdle," Seifert said in an interview. "The [Delaware] insurance commissioner still has to pass on it, but I think a degree of caution is warranted given the situation. Investors need to be mindful that other financial requirements could be forced upon to get the deal done."
Wells Fargo analyst Sean Dargan wrote in a research note that Delaware's "biggest sticking point" may have recently been removed. Before the key CFIUS decision to approve the deal, the companies released an amended application to renew the process, excluding the "unstacking" of Genworth Life & Annuity Insurance Co. from parent company Genworth Life Insurance Co. In addition, the filing showed China Oceanwide's intent to contribute up to an aggregate $1.50 billion to Genworth over an undisclosed period of time after the deal's completion.
In a statement, Delaware Deputy Insurance Commissioner Tanisha Merced wrote that the new application "indicates that significant additional information" will be provided in the coming weeks. That said, the department has not set a timeline for approving the deal or even scheduling a hearing.
Prior to the deal's terms being amended to abandon the unstacking plan, the transaction had been previously approved by state insurance commissioners in Virginia, North Carolina, South Carolina and Vermont.
That CFIUS and several state regulators signed off on the merger does not necessarily mean it will make it to the finish line. In another proposed merger between a U.S. life insurer and a Chinese company, CFIUS approved the sale of Fidelity & Guaranty Life to Anbang Insurance Group Co. Ltd. That transaction, however, was ultimately struck down by state regulators in Iowa and New York.
BTIG equity analyst Mark Palmer said in a research note that while he acknowledges the "progress" of CFIUS approval, the "potential risks associated with the [Delaware Department of Insurance] application including those identified by the Deputy Insurance Commissioner in her statement remain a key source of uncertainty."
As a result, Palmer wrote, he views the stock as fairly valued at the deal's per-share price tag of $5.43 when considering the significant downside risk if the transaction fails to close.
Shares of Genworth soared more than 27% on news of the deal in early trading on June 11, the first trading day since the CFIUS announcement. The stock finished the day up 26.51% at $4.82 per share, on almost 9x the average daily volume.
Genworth's bonds also rallied following the CFIUS announcement. Genworth's 7.625% notes due 2021 and 4.8% notes due 2024 ticked up 7.875 points and 7 points, respectively, in morning trading, climbing to 106 and 91.5, according to MarketAxess. In addition, the issuer’s 7.7% notes due 2020 tacked on about 3.75 points, rising to 105.75.
