EC Profit On Genworth Deal Uncertainty

Thesis: Substantial pessimism of the completion of the Genworth (NYSE:GNW) deal to be acquired by China Oceanwide presents an opportunity for the smart investor.

Risk/Reward

The shares have a deal premium priced into them. They could lose that premium quickly if the deal is renegotiated. The potential acquirer can renegotiate the deal because they have so much leverage in the situation. The company is performing poorly and there are no other known bidders or indications of interest.

Overview

The shares have been a poor performer due to a lack of earnings, and the inability of the company to take proactive steps for shareholders i.e. stock buybacks or dividends.

GNW Chart

GNW data by YCharts

Book Value

It is possible to say, based on book value, that the shares are undervalued. However, looking at the performance of the shares, one could have made that case for the past decade, with only losses to show for it.

GNW Chart

GNW data by YCharts

Earnings and Cash

Obviously, the shares have been incredibly disappointing for shareholders. And here we see that the cash generated by the company has been steadily declining with the shares.

Cash would have provided the ability for the company to undertake some steps to create value for shareholders like a dividend or buyback.

GNW Chart

GNW data by YCharts

Catalysts

Again we see the potential for the shares to be considered undervalued, but there appear to be few catalysts on the horizon for the underlying company. Hoping for a higher bid (or for the current bid to be honored) or for another bidder is wishful thinking, but it is optimistic speculation.

Deal Risk

The real risk to shareholders is if the current deal is renegotiated or the offer is lowered.

GNW Chart

GNW data by YCharts

Virtually no deal arbitrage

In a normal deal situation, the shares would be trading at a much closer value to the proposed deal price. Genworth shares trade at $4 and the offer price is $5.43. Obviously, there is substantial skepticism that the deal will go through at that level, or possibly at all. Analysts have already voiced their opinions that the deal will be re-negotiated. This is already known. And the share price and options reflect this uncertainty.

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Comments

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Joe Economy 3 days ago Member's comment

Buying any investment based on a potential buyout is extremely risky. Perhaps one option is to track the pre-market buying activity as a sign of an imminent buyout event. Keeping a eye out for huge volume shifts in pre or post market for a stock is a method some use to see the direction of the stock prior to market opening.

The Frugal Prof 3 days ago Author's comment

Thx joe.

The recommendation wasn't to buy the stock. The buyout has already been announced.

Good luck to you

Joe Economy 2 days ago Member's comment

But the deal hasn't gone through yet? Quoting from your article:

"....there is substantial skepticism that the deal will go through at that level, or possibly at all."

If that's the case, there may well be considerable volatility ahead for the stock.

The Frugal Prof 1 week ago Author's comment

Thank you Susan, Kurt, and Gary. Appreciate it. 👍

Kurt Benson 1 week ago Member's comment

Looking forward to more by you!

Susan Miller 1 week ago Member's comment

Excellent read and worthy addition to the site.

Gary Tanashian 1 week ago Contributor's comment

That is an interesting piece of funda analysis and strategy. Specifically "sell the deal risk".