Thesis: Substantial pessimism of the completion of the Genworth (NYSE:GNW) deal to be acquired by China Oceanwide presents an opportunity for the smart investor.

Risk/Reward

The shares have a deal premium priced into them. They could lose that premium quickly if the deal is renegotiated. The potential acquirer can renegotiate the deal because they have so much leverage in the situation. The company is performing poorly and there are no other known bidders or indications of interest.

Overview

The shares have been a poor performer due to a lack of earnings, and the inability of the company to take proactive steps for shareholders i.e. stock buybacks or dividends.

GNW data by YCharts

Book Value

It is possible to say, based on book value, that the shares are undervalued. However, looking at the performance of the shares, one could have made that case for the past decade, with only losses to show for it.

GNW data by YCharts

Earnings and Cash

Obviously, the shares have been incredibly disappointing for shareholders. And here we see that the cash generated by the company has been steadily declining with the shares.

Cash would have provided the ability for the company to undertake some steps to create value for shareholders like a dividend or buyback.

GNW data by YCharts

Catalysts

Again we see the potential for the shares to be considered undervalued, but there appear to be few catalysts on the horizon for the underlying company. Hoping for a higher bid (or for the current bid to be honored) or for another bidder is wishful thinking, but it is optimistic speculation.

Deal Risk

The real risk to shareholders is if the current deal is renegotiated or the offer is lowered.

GNW data by YCharts

Virtually no deal arbitrage

In a normal deal situation, the shares would be trading at a much closer value to the proposed deal price. Genworth shares trade at $4 and the offer price is $5.43. Obviously, there is substantial skepticism that the deal will go through at that level, or possibly at all. Analysts have already voiced their opinions that the deal will be re-negotiated. This is already known. And the share price and options reflect this uncertainty.