Preparing to embark on the biggest product offensive in decades, General Motors has announced that it will purchase the auto financing operations of Ally Financial in Latin America, Europe, and China. The deal, which was rumored this summer, is expected to stimulate sales at GM by ensuring customers are able to obtain a loan to pay for them.
As part of the transaction, General Motors will transfer $2 billion to its wholly-owned subsidiary — GM Financial, which in turn will supply the balance of the $4.2 billion deal. GM’s purchase price depicts a $550 million premium to the book value of Ally’s assets. The deal is expected deal will double GM Financial’s assets to nearly $33 billion, while increasing its liabilities — including consolidated debt — to roughly $27 billion. GM Financial’s liabilities are about $12 billion today. However, the acquisition is expected to add $300 million to $400 million to GM Financial’s annual earnings before taxes, equating to about $1 billion per year on a pro forma basis.
GM Chief Financial Officer Daniel Ammann commented on the advantageous timing of the transaction, saying that “GM is entering the most aggressive rollout of new vehicles in its history and this acquisition will make us an even more formidable competitor by ensuring that competitive financing is available to our customers and dealers around the world.”
Ally, formerly known in GMAC, was GM’s captive finance arm from 1919 until 2006, when GM sold 51 a percent stake to private equity firm Cerberus Capital Management. In 2008, GMAC underwent a government-funded bailout and subsequently returned to profitability in 2010, changing its name to Ally Financial. Even though an initial public offerring was planned for 2011, the finance firm is still 74 percent owned by the U.S. Treasury; the IPO did not take place due to a volatile stock market.
Similarly, General Motors underwent a government-funded bailout in 2009 and established GM Financial in 2010 by purchasing AmeriCredit. The Texas-based organization specialized in subprime auto lending, and GM’s purchase of the firm allowed GM the ability to offer captive financing capabilities in the U.S. and Canada while giving the automaker the ability to offer consumer lease options. With the addition of Ally International Operations, GM Financial will now be able to serve GM customers in roughly 80 percent of its global sales markets while earning strong risk-adjusted returns.
“The Ally International Operations have very strong underwriting and risk management, close relationships with GM dealers and an excellent customer service reputation,” said Dan Berce, president and CEO of GM Financial. “The addition of these businesses significantly strengthens GM Financial’s core role, which is to support the sale of GM vehicles.”
Subject to regulatory approvals, the transaction is expected to close in mid-2013 and includes Ally operations in Brazil, Mexico, Colombia, Chile, Germany, the United Kingdom, France, Italy, Belgium, the Netherlands, Sweden, Switzerland and Austria. The deal includes Ally’s 40 percent stake in GMAC-SAIC Automotive Finance Company, the joint venture with SAIC that’s similar to GM’s existing venture with the Chinese automaker.
The GM Authority Take
Having a captive finance arm is an absolute must for a major global automaker such as General Motors for two reasons:
- It helps sell more cars, given that the captive finance organization understands the product of its parent company better than any third party lender can ever dream of, thereby having better information on vehicle depreciation — a major factor used to calculate interest rates and lease payments. As such, a captive finance department results in a higher incentive for the firm to “make” the deal when called upon.
- Financing, as a whole, is also a fairly profitable service.
The second element happens to be one of the main objectives being pursued by GM CEO Dan Akerson. As such, GM’s decision to buy Ally’s international business — which was likely pennies on the dollar compared to its value before the economic meltdown seen toward the end of last decade — might be one of the key steps by GM to re-establish a new GMAC.