General Motors Co., the automaker 61 percent owned by the U.S., is buying subprime lender AmeriCredit Corp. for $3.5 billion to help it reach more customers with leases and loans to borrowers with faulty credit records.
The price of $24.50 a share is 24 percent more than Fort Worth, Texas-based AmeriCredit’s closing price yesterday of $19.70 a share in New York Stock Exchange composite trading. AmeriCredit rose to $23.91 at 4 p.m.
“This helps GM finance less-than-perfect-credit buyers and God knows there’s plenty of them today with economic conditions as they are,” said Joe Phillippi, principal of AutoTrends, a consulting firm in Short Hills, New Jersey. “A lot of people in the vast heartland of this country don’t have particularly great credit histories and that region has been the core of GM’s strength.”
GM had considered buying back its former lending arm, GMAC LLC, starting a bank or working with outside lenders to offer customers more financing options, three people with knowledge of the discussions said this month. Buying GMAC, now called Ally Financial Inc., or starting an in-house banking unit proved too difficult at that point, they said.
As long as GM is majority-owned by the U.S., it shouldn’t be in the subprime lending business, said John Berlau, a policy director at the Washington-based Competitive Enterprise Institute, which promotes limited government.
“When we bailed out GM, what were we bailing out?” Berlau said. “The rationale behind the financial-regulatory bill that just passed was that subprime lending was bad, but the government’s in the subprime business.”
Chief Executive Officer Ed Whitacre had wanted to buy or start a lending arm before a fourth-quarter initial public offering, people familiar with the matter said in May. The automaker had decided a deal couldn’t be reached in that time frame, people with direct knowledge said earlier this month.
“Adding AmeriCredit to our team will improve our competitiveness in auto financing offerings,” Whitacre said in a statement.
The purchase fits with Whitacre’s plan to sell more cars and get maximum value for GM’s IPO, said Rebecca Lindland, an analyst at IHS Global Insight Inc. in Lexington, Massachusetts.
“It’s a really good piece to a very complex puzzle,” she said. “This makes a lot of sense.”
While the deal will help GM dealers sell more small, affordable cars to subprime customers, “it won’t be a blank check” to buyers because the U.S. government will be scrutinizing lending, she said.
The automaker gets about 4 percent of its sales from subprime borrowers, Chief Financial Officer Chris Liddell said when revealing the acquisition in a briefing today at GM headquarters in Detroit. The company sells 7 percent of its cars through leasing programs, compared with 21 percent for the industry, he said. Liddell said GM can increase sales by boosting penetration into both financing options.
“When you look at the population, about 40 percent falls into non-prime,” Liddell said. “We think it will help. Four percent of our sales are to non-prime customers. If you just hit a modest increase from 4 to 5 percent, it’s a significant number.”
GM will continue to work with other lenders and AmeriCredit will provide a “single-digit” percentage of GM’s financing, Liddell said.
“We’re still working actively with other banks,” Liddell said. “This is not going to be the only solution. There are multiple ways of solving various financing solutions. This is non-prime and leasing, a more targeted part of the market.”
AmeriCredit, which focuses of buyers with credit scores of 500 to 650, will continue to do business with non-GM dealers, CEO Daniel Berce said on a conference call.
GM has worked with AmeriCredit since September 2009, boosting its penetration into the subprime consumer market, Liddell said. Since the relationship had worked well, the two companies started talking a month ago about expanding it and the conversation evolved into talk of an acquisition, Liddell said.
GM and Americredit reached a definitive agreement, which has been approved by the boards of both companies. GM said the deal is expected to close in the fourth quarter.
“It came together very quickly,” he said.
The acquisition should help dealers sell more cars and trucks, said Mike Jackson, CEO of AutoNation Inc., the top retailer of GM vehicles in the U.S.
“This will help GM improve their sales 10 to 15 percent,” he said in an e-mail. “We see this as a boost to our GM business.”
GM plans to file a prospectus next month and sell the shares in November if market conditions permit, two people familiar with the situation have said. The company plans to sell 20 percent of Treasury’s stake, which would reduce the government’s ownership to less than 50 percent, said two people familiar with the plan.
The sale will probably raise $10 billion to $15 billion, depending on the company’s performance, the strength of the economy and the health of the IPO market, people familiar with the plan said in June.
Acquiring a lender will also help GM attract investors for its planned initial public offering of stock, Phillippi said.
“It should help with the IPO as part of the pitch” to investors, Phillippi said. “It answers one of the obvious questions about how you’re going to do more leasing and sub-prime lending without relying on outside sources.”