GM keeps alliance with Ally intact despite AmeriCredit deal
GM CFO Chris Liddell called Ally a “critical partner.” He said the planned acquisition of AmeriCredit announced today is a bid to expand GM's leasing, subprime and Canadian business. During a conference call this morning, Liddell declined to say whether GM is shopping for other finance businesses.
Ally, GM's former captive arm, remains GM dealers' preferred lender for commercial loans such as vehicle inventory credit lines and for retail loans to customers with good credit.
“We look forward to continuing our strong relationship with Ally Financial,” Liddell said.
In a statement, Ally said the partnership is “strategically important to both organizations” and noted its high market share. In the first quarter of this year, Ally provided financing for about a third of the GM vehicles retailed and nearly 90 percent of the GM vehicles in inventory.
The company wrote $6.0 billion in retail auto loans in the first quarter, $4.1 billion of which funding purchases of GM vehicles.
Meanwhile, AmeriCredit will continue to buy subprime contracts from non-GM dealerships.
Dealers welcome GM's effort to go after subprime business, because the number of consumers with bad credit has swelled in the troubled economy.
“A lot of people have been out of work and lost their jobs,” said Martin NeSmith, a Claxton, Ga., GM dealer. “The deal with AmeriCredit is a good idea because we really don't have the access to subprime financing, and there are so many people now with risky credit. They need to have cars, too.”
Over the short term, the transaction has little effect on GM dealers or their relationship with Ally. AmeriCredit already was GM's preferred lender for subprime customers, and the automaker promoted most of its lease programs through U.S. Bank.
Ally, formerly GMAC Financial Services, wound down its subprime subsidiary, Nuvell Financial Services, last year for lack of funds. But Ally says it remains in the subprime business and is trying to build it. Leasing also skidded to a stop, although Ally has offered limited lease programs since the second half of 2009.
GM says its primary lease provider is U.S. Bank.
GM declined to flesh out plans for its new finance arm beyond the subprime and leasing business. Although it clinched the deal with AmeriCredit quickly over the past month, growing a full-blown captive would take time.
AmeriCredit has demonstrated the ability to raise capital in good times and bad for high-risk loans, but it has a fraction of the capital of other captive finance companies. AmeriCredit also has no experience in the floorplan business -- providing inventory financing -- an integral component of a captive lending program.
“It's difficult to switch floorplan lenders,” said Mike Charapp, a McLean, Va., dealer attorney. “After the credit crisis, dealers have learned not to bounce around. The floorplan relationship is critical.”
AmeriCredit's retail auto loan business is about a tenth of the size of Ally's. In its fiscal quarter ending March 31, AmeriCredit reported net income of $63 million and wrote $624 million in loans. Its total loan portfolio was $9 billion.
In its 20-year history, the independent finance company specialized in subprime credit, typically customers with credit scores ranging from 500 to 650. In 2006, AmeriCredit acquired two finance companies, increasing its business to people with fair and good credit. But the subprime segment continues to be AmeriCredit's primary business.
The all-cash deal is valued at $3.5 billion, with GM paying AmeriCredit shareholders $24.50 per share. AmeriCredit stock closed at $19.70 the day before the deal was announced.
GM said in a statement today that the acquisition “establishes the core" of a captive finance arm, something the automaker has lacked since it sold off a controlling stake in GMAC in 2006.
GM had considered buying back GMAC, 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 or starting a new, in-house banking unit proved too difficult at that point, they said.
CEO 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 boards of both companies have approved the deal. GM said it is expected to close in the fourth quarter, pending approval by AmeriCredit's shareholders.
GM has worked with AmeriCredit since September 2009, boosting its penetration into the subprime consumer market, Liddell said. Because the relationship had worked well, the two companies started talking a month ago about expanding the relationship.
Over the past month, the conversation evolved into talk of an acquisition, Liddell said. “It came together very quickly.”
Bloomberg contributed to this report.
PRESS RELEASE: GM to Acquire AmeriCredit
Will form core of GM's captive finance arm
Bolsters retail financing options for dealers and consumers,
supporting GM North America sales growth
DETROIT – To meet customer demand for leasing and non-prime financing for GM vehicles, General Motors and AmeriCredit Corp. (NYSE: ACF) today announced they have entered into a definitive agreement for GM to acquire AmeriCredit, one of the nation's leading independent auto finance companies, in an all-cash transaction valued at approximately $3.5 billion.
“This acquisition supports our efforts to design, build and sell the world's best vehicles by expanding the financing options we can offer to consumers who want to buy GM vehicles," said GM Chairman and Chief Executive Officer, Ed Whitacre. “Adding AmeriCredit to our team will improve our competitiveness in auto financing offerings, and I am very pleased to have them on board."
The acquisition establishes the core of a new GM captive financing arm that will enable GM to provide customers with a more complete range of financing options, while creating significant growth opportunities for both GM and AmeriCredit. Since GM and AmeriCredit launched a successful non-prime program in September 2009, GM's non-prime penetration has increased significantly. Upon completion of the transaction, AmeriCredit intends to also re-enter the leasing business which will provide expanded leasing availability for all GM customers.
Direct ownership of AmeriCredit's expertise will provide consistent availability of non-prime financing for GM customers throughout all economic cycles. While AmeriCredit already has relationships with approximately 4,000 GM dealers, this transaction will enhance dealer receptivity and improve sales penetration rates through coordinated GM branding and targeted customer marketing initiatives.
“With AmeriCredit providing us niche capabilities in leasing and non-prime financing, along with the continued strong support of Ally Financial and others for prime retail and dealer financing, we've set up a very competitive solution for our financing needs, which will be resilient through credit and business cycles,” said GM Vice Chairman and Chief Financial Officer, Chris Liddell.
AmeriCredit President and Chief Executive Officer Daniel Berce said, “We're excited about joining the GM team. While we will be expanding our product set to more fully support GM, we'll continue to offer our loan products to the more than 11,000 dealers across the country we serve today. Long term, this transaction will deliver benefits to our dealers, customers and employees.”
The highly regarded AmeriCredit management team will remain intact, which will assist in minimizing integration risk and maximizing opportunities between the two companies.
With total assets of approximately $10 billion, the acquisition of AmeriCredit poses minimal impact to GM's balance sheet, and does not change GM's objective of achieving strong investment grade status. Under GM ownership, AmeriCredit will maintain its own direct access to the capital markets for its financing requirements.
Under the terms of the agreement, which has been approved by both companies' boards of directors, at closing, AmeriCredit shareholders will receive $24.50 in cash for each share of stock held as of the transaction closing date.
The transaction is expected to close by the end of the fourth quarter of 2010, pending certain closing conditions, including the approval of AmeriCredit shareholders.