Is Genworth Financial a Buy?

Genworth Financial (NYSE: GNW), a leader in long-term care (LTC) insurance and mortgage insurance, is trading for about $4.50 per share. This is rather cheap, considering there's a pending acquisition of the company at a price of $5.43 that management is hoping will close within the next few months.

However, there's a big caveat here. The acquisition still has quite a few regulatory hurdles to cross before it's a done deal. Let's look at why there is such a disparity between the current stock price and the acquisition price, and see whether Genworth is a quick potential payday for investors or a trap to be avoided.

Genworth as an investment: The 1-minute version

Genworth has been struggling to turn a profit over the past few years, although the company's recent results have been more promising. In the third quarter of 2018, Genworth earned $0.29 per share in adjusted operating income, nearly double the result from the same quarter a year ago, although revenue was flat.

However, the investment case for Genworth has little to do with its financial results at this point. The company has agreed to be purchased by China-based Oceanwide Holdings Group, and the proposed purchase price of $5.43 per share is significantly higher than Genworth's current stock price.

Current state of the proposed acquisition

The proposed acquisition by Oceanwide has dragged on for a long time. It was originally announced in October 2016, and the deadline to obtain regulatory approval has been extended six times so far. For much of the time since the announcement until recent months, it appeared highly unlikely that the deal would close at all.

Recently, however, there have been some major developments. The Delaware Department of Insurance approved the proposed acquisition at a November hearing, and Freddie Mac and Fannie Mae have approved Oceanwide's purchase of Genworth's large and profitable mortgage insurance business.

These were certainly major milestones, but it's important to emphasize that the finish line is still pretty far away. Regulatory approvals need to be obtained in the U.S., China, and several other international jurisdictions. The current deadline for the acquisition is Jan. 31, 2019, but I wouldn't be at all surprised if it is extended again, as Genworth said in a recent press release that both companies recognize that "securing all required regulatory approvals will likely extend into early 2019."

The bottom line on Genworth Financial

With Genworth's financial struggles in recent years, the question of whether the stock is a buy or not comes down to whether you believe the proposed acquisition will be approved and completed. While some key regulatory hurdles have been cleared recently, the acquisition is still far from certain.

If Genworth is finally acquired by Oceanwide in 2019 as the companies expect, there's a 17% upside from the share price as of this writing. On the other hand, if Genworth is not acquired, it's important to point out that the stock dipped below $3 in early 2018 when the acquisition was viewed as unlikely to close, and it could certainly plunge back to those levels if the sale falls through.

At this point, I view Genworth as more of a speculative play than an investment; whichever way you think the proposed acquisition will go, I encourage you to think of it in the same way.

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Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.