On April 15, 2019, Genworth Financial, Inc. (Genworth) filed with the Securities and Exchange Commission (SEC) an amended 10-K report for the year ended December 31, 2018. Here I discuss the amended report and several other recent developments relating to the proposed merger agreement between Genworth and China Oceanwide.
The Amended 10-K Report
In its 2018 proxy statement, filed with the SEC on November 1, 2018, Genworth said it expected to hold its 2019 annual meeting on or about July 18, 2019. The amended 10-K report says that, because Genworth and China Oceanwide are still trying to satisfy the closing conditions under their proposed merger agreement, Genworth postponed the meeting and implied there may not be a 2019 annual meeting. If there is a 2019 annual meeting, Genworth will provide adequate notice to shareholders. The explanatory note in the amended 10-K report is in the complimentary package offered at the end of this post.
A Recent 8-K Report
On March 14, 2019, Genworth filed with the SEC an 8-K (significant event) report listing developments relating to the proposed merger with China Oceanwide. The original merger agreement was entered into on October 21, 2016. Since then, the parties entered into nine "waiver agreements" under which the parties extended the "end date" in the merger agreement. In the waiver agreements, the parties also waived the right to terminate the merger agreement and abandon the merger due to a failure to consummate the merger agreement on or before a specified date. The dates of the waiver agreements listed in the recent 8-K report are: August 21, 2017; November 29, 2017; February 23, 2018; March 27, 2018; June 28, 2018; August 14, 2018; November 30, 2018; January 30, 2019; and March 14, 2019. In the last of those waiver agreements, the parties extended the end date to April 30, 2019, and waived until that date the right to terminate the merger agreement and abandon the merger due to a failure of the merger to have been consummated on or before March 15, 2019.
Also attached to the recent 8-K report is a Genworth press release dated March 14, 2019. It discusses the last of the above waiver agreements, and says the closing of the merger agreement remains subject to the approval of regulators in Canada and China. The Genworth press release is in the complimentary package offered at the end of this post.
The Delaware Department
On November 8, 2018, the Delaware Department of Insurance (Department) issued a press release announcing a November 24 hearing to be held on China Oceanwide's application to acquire Genworth and certain affiliates. The Department said the hearing would be presided over by Stephen P. Lamb, a former Vice Chancellor of the Delaware Court of Chancery. Judge Lamb is now of counsel in the Corporate and Litigation Departments in the Wilmington, Delaware office of the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP. The Department's press release is in the package offered at the end of this post.
The Hindenburg Letter
On November 28, 2018, the Department held the hearing. The transcript mentioned a 13-page letter Hindenburg Research had submitted to the Department on November 20, 2018. Hindenburg, which was founded by Nathan Anderson, CFA, CAIA, engages in financial research. Hindenburg sometimes takes either a long position or a short position on the shares of public companies it examines. Hindenburg's name stems from what the firm describes as the "epitome of a totally man-made, totally avoidable disaster" where "Almost 100 people were loaded onto a balloon filled with the most flammable element in the universe."
In the Hindenburg letter, which is included in its entirety in the complimentary package offered at the end of this post, the firm discloses its short position on Genworth shares. The firm questions the ability of China Oceanwide to carry out its responsibilities under the merger agreement. Here are some of Hindenburg's comments:
- China Oceanwide has consistently generated negative operating performance.
- It has plugged its performance hole with borrowings, which have reached the point of clear unsustainability.
- Rating agencies have downgraded its key operating subsidiaries, similarly citing their debt load as "unsustainable." Meanwhile, recent media reports have shown that operating subsidiaries are scrambling to sell assets to pay off debt.
- When factoring in questionable "current" assets, the true working capital position of the conglomerate is impaired, and there are red flags in regard to related party receivables.
- The conglomerate has used more short-term debt and unstable equity share pledges to sustain its operations.
One witness at the Department's hearing was Thomas J. McInerney, president, chief executive officer, and a director of Genworth. Another witness was Xiaoxia Zhao, a director of Oceanwide Holding Co., Ltd., and general manager and director of Asia Pacific Global Capital. Zhao is not a native English speaker, and testified through an interpreter. Both witnesses said they were aware of the Hindenburg letter and disagreed with the findings described in it.
Judge Lamb's Recommendations
On December 14, 2018, Judge Lamb submitted to the Department a 44-page letter including his recommendations and a proposed order approving the merger agreement. Here are some comments he provided (shown here without citations) about the Hindenburg letter:
8. The First Email, the Second Email and the Third Email all relate to articles published by Hindenburg Investment Research. Those articles and the Hindenburg Letter purport to raise concerns primarily related to the financial stability of the Applicants and, to a lesser degree, the financial stability of Genworth and the Domestic Insurer.
9. Regarding the financial stability of the Applicants, the conclusions drawn by Hindenburg are inconsistent with the results of the due diligence conducted by Genworth and its outside financial advisors, and the sworn testimony of Mr. Zhao on behalf of the Applicants.
10. Given the analysis conducted by Genworth, the Department and their experts, there is sufficient evidence that the concerns raised by Hindenburg, insofar as such concerns relate to Section 5003(d)(1)(c) regarding the financial condition of any acquiring party being such as might jeopardize the financial stability of the insurer, or prejudice the interests of its policyholders, have been sufficiently addressed.
11. Genworth and the Department have both concluded and the evidence supports the conclusion, that the financial condition of the Applicants is not such as would jeopardize the financial stability of the Domestic Insurer or prejudice the interest of its policyholders.
17. Hindenburg states that it has a short position on shares of Genworth, essentially betting against the success of Genworth and the Proposed Acquisition. Based on this conflicting financial interest, the statements made by Hindenburg in its articles and the Hindenburg Letter should be viewed with skepticism.
The above five comments are from a subsection entitled "Public Comments" in Judge Lamb's letter. The full subsection is in the complimentary package offered at the end of this post.
The Department's Approval
On December 21, 2018, the Department issued a press release announcing Delaware Insurance Commissioner Trinidad Navarro's four-page Final Order and Decision approving the merger agreement between Genworth and China Oceanwide. The press release is in the complimentary package offered at the end of this post.
A Recent Press Release
On April 29, 2019, Genworth issued a press release announcing the parties' tenth waiver agreement. The parties extended the end date to June 30, 2019, and waived until that date the right to terminate the merger agreement and abandon the merger due to a failure of the merger to have been consummated on or before April 30, 2019. The press release is included in the complimentary package offered at the end of this post.
A Recent Article
Also on April 29, Best's Insurance News & Analysis posted an article entitled "Policyholders, Agents Allege Genworth Stripped $410 Million From Long-Term Care Unit." The article, by reporter Frank Klimko, discussed a lawsuit filed in Delaware state court, and said Genworth has filed a motion to dismiss the lawsuit.
General Observations
I have written extensively about long-term care (LTC) insurance in general and about Genworth in particular, but have never tried to evaluate the proposed merger agreement between Genworth and China Oceanwide. Thus I cannot comment about the likelihood of success for the merger. However, after reading the Hindenburg letter, I am concerned about the merger. I am also disturbed, for two reasons, by the manner in which the Department brushed off the letter.
First, I am troubled by McInerney's reference, in his testimony at the hearing, to allegations in a then-pending lawsuit filed in state court in New York against Hindenburg and others. On March 12, 2019 (3½ months after the hearing), the judge in the New York case granted the defendants' motion to dismiss the complaint. The judge ruled, among other matters, that statements the defendants made about the plaintiff were protected expressions of opinion and were not defamatory. (See Eros International v. Mangrove Partners et al., Supreme Court of the State of New York, New York County, Index No. 653096/2017.)
Second, I am troubled by Judge Lamb's assertion that "the Hindenburg Letter should be viewed with skepticism" because of a "conflicting financial interest." Judge Lamb made the statement without acknowledging that the companies' executives, attorneys, accountants, investment consultants, and other advisors have "conflicting financial interests." In due course we will see whether the merger agreement is consummated, and if so, its impact on Genworth's policyholders.
Available Material
I am offering a complimentary 28-page PDF consisting of the explanatory note in Genworth's amended 10-K report (1 page), Genworth's March 14, 2019 press release (3 pages), the Department's November 8, 2018 press release (2 pages), the Hindenburg letter (13 pages), a subsection of Judge Lamb's December 14, 2018 letter (5 pages), the Department's December 21, 2018 press release (2 pages), and Genworth's April 29, 2019 press release (2 pages). Email jmbelth@gmail.com and ask for the May 2019 Genworth package.
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Email: jmbelth@gmail.com
Blog: www.josephmbelth.com