General Motors Co. (GM) agreed to purchase Ally Financial Inc. (ALLY)’s international auto-finance businesses in a $4.2 billion deal that will give the carmaker an opportunity to expand outside North America.
The sale includes operations in Europe and Latin America as well as Ally’s 40 percent stake in an auto-lending joint venture in China, the Detroit-based companies said yesterday in separate statements. The China business wasn’t among non-U.S. assets that Ally said in May it was seeking to divest.
GM, which counts the U.S. government as its biggest shareholder, is seeking to reverse losses in Europe and a turnaround for its South American results after a $122 million operating loss in that region last year. The automaker, led by Chief Executive Officer Dan Akerson, relies on North America for most of its earnings and is looking to diversify revenue sources. The deal also bolsters GM’s in-house financing arm.
The acquisition is “great” for GM, Matthew Stover, an analyst at Guggenheim Securities LLC, said before the agreement was announced. “Regardless of what auto companies say when they sell their captive finance arms, having a captive finance arm allows you to be much more flexible, responsive, profitable and competitive when you play in the market.”
Ally CEO Michael Carpenter, 65, is selling assets as he seeks to repay taxpayers for a $17.2 billion rescue during the credit crisis. He’s narrowing the focus of his firm, formerly known as GMAC Inc., to auto lending and U.S. banking. GM owned GMAC until 2006, when the automaker sold 51 percent of it to Cerberus Capital Management LP.
Ally sold its international businesses, including two earlier deals, at a 21 percent premium to their tangible book value, the company said in yesterday’s statement. Divesting the units may help Ally repay two-thirds of the government rescue, Carpenter said in a May interview. In October, he agreed to sell a Canadian unit to Royal Bank of Canada in a cash deal providing $4.1 billion in proceeds. Ally also agreed to sell a Mexican insurance business to Ace Ltd. (ACE) for $865 million.
“We are focused on completing each of these transactions and evaluating options to return capital to the U.S. Treasury,” Carpenter said in the statement. “Going forward, we remain squarely focused on further strengthening and growing our leading U.S. automotive services and direct-banking franchises.”
The transaction price includes a $550 million premium to the units’ roughly $3.7 billion tangible book value as measured at the end of September, Ally said.
The sales raised a total of $9.2 billion, or $1.6 billion more than tangible book, a measure of what investors are willing to pay for a firm’s equity after removing intangible items such as goodwill and brand names that would have little value if the company went out of business, according to the statement.
Acquiring some of Ally’s assets would help GM offer competitive loans in South America, where about 50 percent of car sales are financed, Jaime Ardila, president of that region for GM, said last month in an interview in Sao Paulo. The automaker, the biggest in the U.S., said acquisition of Ally’s units helps expand on the success of GM Financial, its growing credit-arm.
“In many markets our financing penetration rates are lower than those of our competitors that have captive finance companies,” Chief Financial Officer Dan Ammann said yesterday in a conference call with reporters. “By having this business back in-house we will be able to drive significant profitable growth for the company around the world.”
Adding Ally’s operations will allow GM Financial to cover customers and dealers in markets that comprise 80 percent of the company’s total global sales, the automaker said in a statement on its website. In addition to China, the purchase includes operations in 13 countries: Brazil, Mexico, Colombia, Chile, Germany, the U.K., France, Italy, Belgium, the Netherlands, Sweden, Switzerland and Austria.
GM is introducing products around the world, including 23 new vehicles in Europe, Ammann said.
The automaker seeks a balanced approached between its in-house lending and outside bank partners, Ammann told analysts on Oct. 31. GM Financial’s assets will double to about $33 billion and liabilities, including consolidated debt, will increase to $27 billion from about $12 billion, the company said yesterday. The Ally acquisition should add $300 million to $400 million to GM Financial’s annual earnings before taxes, GM said.
Third-quarter profit at GM dropped 13 percent to $1.83 billion as losses in Europe pressured results. The firm has posted losses in Europe totaling $17.3 billion since 1999 and said it wants to break even on the Continent by mid-decade.
GM climbed 21 percent this year to $24.60, outpacing the 11 percent advance of the Russell 1000 Index. The stock has declined 25 percent since its November 2010 initial public offering. The U.S. government owns a 32 percent stake in GM, a legacy of the company’s 2009 federal bailout and bankruptcy.
The transaction is expected to close next year in stages and must be approved by regulators, Ally said in the statement. Evercore Partners Inc. and Citigroup Inc. advised Ally.