China Oceanwide Holdings Group Co. has agreed to purchase Genworth Financial Inc. in a $2.7 billion cash deal, joining a record buying spree by Chinese companies as they seek to boost growth overseas.
Monday’s deal by Chinese billionaire Lu Zhiqiang’s real estate and finance company is its largest yet, according to data compiled by Bloomberg. Genworth, with its presence in mortgage insurance as well as long-term care, presents “significant long-term growth opportunities,” China Oceanwide Chairman Lu said in a statement.
Amid cooling economic growth in China and the prospects of a weakening yuan, the nation’s companies have announced $207 billion in overseas transactions this year. Chinese investors such as Anbang Insurance Group Co. and Fosun Group have been especially active as they seek to diversify their assets and offset the impact of a depreciating currency. Some investors also view cash-rich insurance companies as a platform to expand into other businesses, an approach borrowed from Berkshire Hathaway Inc.’s Warren Buffett.
“For the Chinese company, buying U.S. assets is certainly a better way than holding yuan assets at the moment because of the expectation of dollar appreciation,” said Jerry Li, a Hong Kong-based analyst at China Merchants Securities Co. “Theoretically, owning an insurance company can also give it additional resources to make more deals in the future.”
China Oceanwide has pledged to help Genworth manage its debt and strengthen its life insurance units. The offer values Genworth shares at $5.43 each, the companies said in the statement, 4.2 percent more than Friday’s closing price. 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 Chief Executive Officer 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. 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.
“We are providing crucial financial support to Genworth’s efforts to restructure its U.S. life insurance businesses,” Lu said in the statement.
China Oceanwide 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. The company owns controlling stakes in several companies, and the Hong Kong-listed entity has a market capitalization of HK$12.4 billion ($1.6 billion).
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. He dismissed speculation at that time that his moves may signal a looming tussle for ownership with the bank’s biggest shareholder, Anbang.
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.
Overseas buyers have been seeking to enter the U.S. insurance market to expand in a large market and counter some challenges at home.
Japan’s Dai-ichi Life Insurance Co. agreed in 2014 to buy Birmingham, Alabama-based Protective Life Corp., and Sumitomo Life Insurance Co. agreed to purchase Symetra Financial Corp. last year. Anbang agreed to a deal for Des Moines, Iowa-based Fidelity & Guaranty Life that same year, but pulled 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.
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.
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.
Genworth 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.”