This is nearing the end of the story for Genworth MI (TSX: MIC) – Brookfield is offering CAD$43.50 for the remaining 43% stake of the minority shareholders. In addition, they are ditching the Genworth name for Sagen (probably to remove any ambiguity with regards to their discontinued relationship with Genworth Financial). I don’t mind the name change, although I am confused whether it is pronounced with a soft or hard “g”.
Currently MIC shares are trading slightly higher than CAD$44, so there is some sort of anticipation of a minor sweetening to seal the deal (similar to what happened when Brookfield took over the minority stake of Teekay Offshore).
What is interesting is the following paragraph:
Following closing, Brookfield and the Company intend to continue to satisfy the public float requirement of the Insurance Companies Act (Canada) through the issuance of a new class of publicly-traded voting preferred shares of the Company, which preferred shares are intended to be issued prior to or concurrently with closing of the Transaction. A special resolution of shareholders to create this new class of voting preferred shares of the Company will be presented to Company shareholders for approval at the Special Meeting.
I do not know how this will work out in practice. I can’t think of any analogies of such publicly traded firms in Canada that have 100% of the common shares owned by one entity, but the voting rights remaining publicly traded – unless if the public listing is merely symbolic and does not actually trade in any volume. For instance, if the preferred shares have 0% of an economic stake and 100% of the voting rights of the company, what good is it if Brookfield owns 57% of these preferred shares?
In terms of valuation, in Q2-2020, the book value per share of MIC was $41.97, and on the income statement side, was supplemented by a combined ratio of 45%. Although there is a lag effect in terms of the loss ratio rising and an economic calamity (such as COVID-19), they are still minting plenty of cash. At the proposed CAD$43.50 price, shareholders are receiving a somewhat lower premium for their shares than what I would think is warranted, but this is typical to anybody that invests in an entity that Brookfield takes a bit out of – be prepared to get the short end of the stick, always.
I got rid of my shares of MIC in 2018 at a price slightly higher than the proposed takeover price, albeit I would have been a tiny bit richer had I held on – this was before the series of special dividends they declared in 2019.
This news also likely discontinues my coverage of the company – I have been writing about Genworth MI for over 8 years now. My first post about MIC was in June 2012, where I took a position at CAD$18/share. Fond memories.
MIC reported 3Q results today, which are very good:
I’d say a great deal for Brookfield to fix $43.5 on such great performance.
I’d agree with your analysis.
One thing that is not clear to me: what happens after the Brookfield bid is approved? All current minority shareholders mush sell @43.5? Or all shares remaining in free float post deal would be converted to preferred shares?
Will greatly appreciate your thoughts on this.
Went through management circular sent out before voting. BAM’s initially bid was 38-40, then 42.5, then finally 43.5, which was accepted as it hit the range of “fair market value price” according to Scotiabank, the independent valuator.
Speaking of valuation – Scotiabank used 12.3% as discount rate in the DCF model, which to me seems a LOT in the current money market environment. Given its the most sensitive variable in valuation (+-1% = +-$2.39 per share), I’m genuinely wondering if any of the existing shareholders would think of dissenting share rights and try to get a higher price.