For more than half a year after China’s Anbang “insurance” conglomerate mysteriously emerged out of nowhere, announcing its intentions to acquire US hotel chain Starwood, shortly before it even more mysteriously pulled its bid once questions about its source of funds emerged, Chinese M&A activity in the US was put in cryogenic sleep, with not even a peep out of Chinese companies desperate to launder their money in the US using legal methods, most notably mega mergers and acquisitions.
Today that changed when just as unexpectedly, China Oceanwide Holdings Group agreed to buy troubled US insurer Genworth Financial Inc. for $2.7 billion in cash, pledging to help the U.S. firm manage its debt and strengthen life insurance units after it was hurt by higher-than-expected losses tied to long-term care coverage. A China Oceanwide investment platform will pay $5.43 per share, the companies said Sunday in a statement. That’s 4.2% more than Genworth’s closing price of $5.21 Friday. The buyer also promised to provide $600 million to Genworth to address debt maturing in 2018, as well as $525 million to strengthen the life insurance businesses.
“Genworth is an established leader in both mortgage insurance and long-term care insurance, which are markets that present significant long-term growth opportunities,” China Oceanwide Chairman Lu Zhiqiang said in the statement. “We are providing crucial financial support to Genworth’s efforts to restructure its U.S. life insurance businesses.”
In recent months, Genworth CEO Tom McInerney has been selling assets to ensure the insurer has sufficient liquidity after it was hit by losses on its long-term care coverage, which pays for home-health aides and nursing home stays, and as low interest rates crimp returns. At that point, it was almost as if a white knight emerged for the troubled company, one from across the Pacific. China Oceanwide plans to let Richmond, Virginia-based Genworth operate as a standalone company after the takeover with senior management still in place, according to the statement. “Genworth is an established leader in both mortgage insurance and long-term care insurance, which are markets that present significant long-term growth opportunities,” China Oceanwide Chairman Lu Zhiqiang said in the statement. “We are providing crucial financial support to Genworth’s efforts to restructure its U.S. life insurance businesses.”
But who is this bidder/white knight? Very much like Anbang, it is a major financial conglomerate which spans real estate, energy and finance. It was founded in 1985 by Lu, who is a Communist Party secretary, as well as a member of the standing committee of the 12th Chinese People’s Political Consultative Conference, according to the company’s website.
More details from its website:
China Oceanwide Holdings Group was founded in 1985 by Mr. Lu Zhiqiang, the founder, legal representative, Communist Party secretary, and chairman of the group, as well as a member of the standing committee of the 12th Chinese People’s Political Consultative Conference, vice president of the China Non-governmental Chamber of Commerce, deputy chairman of the Oceanwide Foundation,deputy chairman of the China Minsheng Banking, and a member of the board of trustees of Fudan University, etc.
China Oceanwide Holdings Group Co., Ltd., the backbone of the group, has a registered capital of 20 billion yuan. Thanks to over three decades’ development, China Oceanwide Holdings Group has developed into an international group of integrated finance and industry dominated by finance and based on industry, with remarkable market influence and social contribution. It is the controlling shareholder and investor of several China Mainland and Hong Kong listed companies, including Oceanwide Holdings (000046), Minsheng Holdings (000416), China Oceanwide Holdings Limited (00715), Minsheng Bank (600016?01988), and Legend Holdings (03396), thus its comprehensive strength has been enhanced considerably. The Group now owns nearly 100 subsidiaries and more than 10,000 employees, with its businesses and operations present in key cities in China Mainland such as Beijing, Shanghai, Shenzhen, Hangzhou, Wuhan, Qingdao, Xi’an, Dalian, Ji’nan, Weifang and Hong Kong and other regions and countries such as United States, Indonesia and Australia.
Translated: another company with vast political links, and even vaster financial resources mostly denominated in Yuan however, that need to be laundered abroad in the cleanest possible way.
Enter offshore M&A.
Incidentally, Chairman Lu is also one of the founding shareholders of China Minsheng Banking Corp., and earlier this year boosted his stake in the Chinese lender through China Oceanwide. Lu’s purchases of about $1.1 billion in Minsheng’s stock in July reflected his confidence in the Beijing-based lender, he said at the time. And guess what: Anbang emerges once again. As Bloomberg reports, “Lu dismissed speculation at that time that his moves may signal a looming tussle for ownership with the bank’s biggest shareholder, Anbang Insurance Group.”
It is almost as if there are 2-3 Chinese mega conglomerates, whose roots are to be found deep inside the corruption of the financial system, and which quietly are seeking to park as much cash offshore as they can in the form of M&A, which for the target firm is a gift from god: such Chinese M&A is most often price indiscriminate, in fact the more they succeed in overpaying, the better for how much cash will be funneled out of the mainland.
To be sure, as Bloomberg notes, Genworth isn’t likely to see higher bids because of the struggles at its long-term care operation and China Oceanwide’s agreement to add more capital, according to BTIG LLC analyst Mark Palmer. “GNW’s rationale for agreeing to sell itself likely was rooted in the challenges faced by its LTC unit, as the company in conjunction with the sale announcement disclosed that as a result of its annual review of its LTC claim reserves it would increase such reserves,” Palmer wrote in a note to clients.
One almost wonders if nobody else wanted to buy GNW, which did a mega Chinese financial conglomerate, which has no business acquiring semi-solvent US insurers and is desperate to transfer billions in cash from the mainland fo the US and… oh wait, we just answered the question.
A quick prime on what Oceanwide’s $2.7 billion in cash will buy it:
Genworth writes mortgage insurance in the U.S., and has stakes in a Canadian and an Australian home-loan guarantor. Mortgage insurers cover losses for lenders when homeowners default and foreclosure fails to recoup costs. This deal gives China Oceanwide the chance to benefit from gains in the U.S. housing market.
McInerney has been seeking to free up capital to pay bonds coming due, and has also been boosting capital by selling assets. He struck a deal in 2015 to sell a European mortgage unit to AmTrust Financial Services Inc. and also agreed to have Axa SA buy a European unit that offers customers protection against the financial impact of major illness, accident or death. He’s also been working to restructure the business units in a way that’s acceptable to regulators, and won approval from bondholders earlier this year to reorganize some of its units.
The deal will help give Genworth the finances to separate a life and annuity operation from another life insurance arm, according to the statement. Lu said the transaction was structured to make it easier to obtain regulatory approval.
While it is unclear just what the return on the Chinese purchase will be, one party is sure to be delighted with the transaction, assuming it closes: Genworth itself. GNW shares have slumped from as high as $15.53 at the end of 2013 as the company dealt with its long-term care operations. The insurer has also been seeking in recent years to boost rates on old long-term care coverage as medical costs increased and more people than expected held on to those policies. The Chinese buyer has no intention or obligation to add more capital to support those legacy obligations, according to the statement.
“We believe that this transaction creates greater and more certain stockholder value than our current business plan or other strategic alternatives,” McInerney said in the statement. “China Oceanwide is an ideal owner for Genworth. They recognize the strength of our mortgage insurance platform and the importance of long-term care insurance in addressing an aging population.”
Actually, no. They are an ideal owner because they will pay anything to get a fraction of the company’s billions in stranded cash holdings abroad. Even if it means overpaying for questionable assets. Or rather, especially if it means overpaying. And it’s not only China Oceanwide: its nemesis Anbang agreed to a deal for Des Moines, Iowa-based Fidelity & Guaranty Life in 2014, but has hit a roadblock, pulling an application for regulatory approval from New York to buy the firm. Anbang has renewed discussions with regulators about the transactions, people with knowledge of the talks said in September, although in recent months the mood in DC has been rather negative toward Chinese acquirors.
According to Bloomberg. the deal is expected to close by the middle of 2017. Genworth received advice from Goldman Sachs Group Inc., Lazard Ltd., Willkie, Farr & Gallagher LLP, and Weil, Gotshal & Manges LLP, while the board of directors sought guidance from Richards, Layton & Finger. China Oceanwide was advised by Citigroup Inc., Willis Towers Watson Plc, Sullivan & Cromwell and Potter Anderson & Corroon LLP.
Should the deal close, it will likely unleash a surge of more Chinese acquisitions of questionable US companies, leading to even more short squeezes on concerns that the “Chinese are coming.” On the other hand, rumor has it that all it took for the Anbang deal for Starwood to fall apart was one look at the source of funds for the Chinese conglomerate. Considering that the vast majority of Chinese fundings has shady origins, we would not be surprised if this particular deal were to likewise fall apart should the Chinese acquiror be asked even the most cursory question on where it got its money…
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