Brookfield Business Partners L.P. (BBU-UN-T) plans to buy a 57 per cent interest in residential mortgage insurer Genworth MI Canada Inc. (MIC) in a transaction valued at about $2.4 billion (all figures Cdn).
The offer to purchase the 48,944,645 common shares from U.S.-based Genworth Financial Inc., represents a price $48.86 per share. Brookfield Business Partners did not previously own any Genworth Canada shares.
Genworth Canada, through its subsidiary Genworth Financial Mortgage Insurance Company Canada, is the largest private sector residential mortgage insurer in Canada, providing mortgage default insurance to Canadian residential mortgage lenders.
The business is based in Oakville, just outside Toronto.
“We are very pleased to make this investment in Genworth Canada, a high-quality leader in the mortgage insurance sector,” said David Nowak, managing partner of Brookfield Business Partners, in a Tuesday morning release. “Genworth is an industry-leading business that generates strong, consistent earnings and operates in a sector with high barriers to entry.
“We look forward to partnering with management to support its ongoing success, drawing on our expertise in insurance and residential real estate.”
Parent company Genworth Financial Inc., based in Richmond, Va., has been the subject of an extended takeover transaction by China Oceanwide Holdings Group Co. Ltd. China Oceanwide’s bid was originally announced in 2016.
The two firms have now agreed to extend those discussions through Nov. 30.
One factor in those negotiations has been Canadian privacy and data protection laws, and their potential impact on the takeover by a Chinese firm. Divesting itself of the Canadian business would ease those concerns.
Rationale for acquiring Genworth
BBP says there are numerous benefits from the acquisition:
* Essential service: Genworth Canada serves an important role in supporting the stability of Canada’s housing market. Financial institutions in Canada are required to purchase mortgage insurance when residential mortgage down payments represent less than 20 per cent of the purchase price;
* Leading market share: Genworth is Canada’s largest private-sector residential mortgage insurer, offering a broad underwriting and distribution platform across the country that provides customer-focused products and support services to the vast majority of Canada’s residential mortgage lenders and originators;
* High barriers to entry: Genworth Canada operates in a highly regulated industry with strict capital requirements, creating natural barriers to entry in the sector. It has longstanding relationships with high-quality lenders including leading Canadian banks, mortgage finance companies, other regional lenders and credit unions;
* Long-term, stable earnings and strong cash flows: Genworth Canada has what BBP calls a “long-term track record of generating consistent earnings and attractive returns on capital”;
* Resilient risk profile: Genworth Canada’s established national footprint provides geographic market and customer diversity. A strong regulatory framework combined with conservative risk management practices of lenders and insurers has contributed to a stable Canadian housing and mortgage sector with consistently low mortgage delinquency rates.
“We are proud of our track record as Canada’s leading private sector mortgage insurer, with a history of delivering value to shareholders. This transaction marks another significant milestone for the company,” said Stuart Levings, the president and CEO of Genworth Canada, in a separate statement.
“We would like to thank Genworth Financial for their support over the years and look forward to our new relationship with Brookfield Business Partners.”
Brookfield Business Partners intends to fund approximately $930 million of the purchase on closing and have institutional partners to co-invest for the balance.
BBP will also provide Genworth Financial, Inc., with a bridge loan of up to $1.13 billion to be repaid from proceeds of the sale. The transaction, including the bridge loan, will be funded from existing liquidity.
“We are pleased to find such a high-calibre buyer for our interest in Genworth Canada,” said Tom McInerney, president and CEO of Genworth Financial, in a prepared statement. He added Brookfield Business Partners offers deep expertise in the insurance and residential real estate sectors.
“We look forward to working with Brookfield Business Partners through the sale process and required regulatory approvals and, ultimately, moving forward with our long-awaited closing of our merger with Oceanwide.”
Added LU Zhiqiang, chairman of Oceanwide, in the same statement: “We are pleased with the quality of the buyer as well as the purchase price they have offered. We share Genworth’s commitment to bringing this process to a successful conclusion and closing the transaction as soon as possible.”
BFIN Securities LP, BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets, and Scotiabank acted as financial advisors, and Torys LLP as legal advisors, to Brookfield Business Partners.
BBP to nominate board members
Closing of the transaction is subject to customary approvals, including the approval of Canadian regulators, and is expected to occur in the second half of 2019.
On closing, Genworth Financial’s nominees on the board of directors of Genworth Canada and its wholly owned subsidiaries will resign from their positions, with the exception of Levings. The vacancies will be filled by nominees of Brookfield Business Partners.
Brookfield Business Partners says it has no plans, at present, to acquire the balance of the outstanding shares.
Brookfield Business Partners is a business services and industrials company focused on owning and operating high-quality businesses that benefit from barriers to entry and/or low production costs. Brookfield Business Partners is listed on the New York and Toronto stock exchanges.
Brookfield Business Partners is the flagship listed business services and industrials company of Brookfield Asset Management Inc. (BAM-A-T), a leading global alternative asset manager with more than $510 billion of assets under management.