Thursday, February 22, 2018

Open for business?

Chinese buyers looking for acquisitions in the US are watching China Oceanwide’s attempt to buy Genworth with interest.

The two companies refiled their proposed deal for the third time this week after the US$2.7 billion acquisition has repeatedly been blocked by the Committee on Foreign Investment in the US (CFIUS). The deal was last withdrawn in October.

Opposition to deals by Chinese buyers on the grounds of national security have been on the rise for the past few years and, while Donald Trump has used some tough rhetoric against China at times, he has also boasted about his relationship with Chinese president Xi Jinping and wants China’s help in curbing North Korea’s nuclear weapons programme.

Chinese investment firm Canyon Bridge Capital Partners decided to test the president’s resolve in September by pushing for his verdict on its acquisition of Lattice Semiconductor. CFIUS had recommended against the deal, which almost always results in a withdrawal, but the Chinese firm pushed ahead to see if Trump would personally block it. He did.

And right at the start of 2018, CFIUS rejected its most high-profile Chinese acquisition of the Trump era — the US$1.2 billion purchase of money transfer company MoneyGram by Ant Financial, part of Jack Ma’s Alibaba group.

However, Trump insisted that the US was “open for business” at Davos for the World Economic Forum in January and treasury secretary Steve Mnuchin, who leads the CFIUS committee, met with Chinese finance minister Xiao Jie on February 1. The two discussed bilateral economic issues, according to a spokesperson, including “the need for a more balanced and reciprocal trade and investment relationship between the US and China”.

Oceanwide, which is privately owned by billionaire property developer Lu Zhiqiang and owns Asia Pacific Property & Casualty Insurance in China, refiled its deal less than a week after this meeting.

The new submission contains an “additional data security risk mitigation proposal involving a US third-party service provider”.

Insurance regulators have already provisionally approved the deal, so the security issue seems to be the only sticking point. CFIUS is reportedly concerned about the Chinese government gaining access to Americans’ personal information. As this was also the issue with Ant Financial’s MoneyGram deal, finding a solution to the data privacy problem could unlock the door for further deals involving customer data — which would generally seem to cover CFIUS objections to all insurance and financial services acquisitions.

It remains to be seen if the third-party route will be effective, but Genworth and Oceanwide clearly have some confidence in the tactic.

“We continue to believe the transaction with Oceanwide represents the greatest and most certain value for our stockholders,” said Tom McInerney, president and chief executive of Genworth, which is facing a debt crunch as US$600 million of repayments loom this year.

However, even if the China deal is ultimately successful it cannot happen soon enough to keep the wolf from the door and the company is instead pursuing a secured debt transaction to address its 2018 debt obligation.

The CFIUS refiling triggers a 30-day review period, which may be followed by an additional 45-day investigation. The verdict will let us know if Trump’s “open for business” rhetoric should be taken seriously.

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Nina Klingspor, Allianz Global Corporate & Specialty

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