General Motors Company (NYSE:GM) has agreed to acquire Ally’s automotive financing operations in Latin America, Europe and China for $4.2bn. This announcement, and the $4 bn acquisition price were in-line with expectations. And as many had expected, the acquisition is not expected to require a massive amount of cash from General Motors Company (NYSE:GM).
General Motors Company (NYSE:GM) will contribute $2 bn of additional equity capital to GMF to support the acquisition, and additional growth plans ( GMF is only 2.2x levered as of Q3, compared with 8x for Ford Credit, and that this acquisition could be accomplished largely through increases to GMF’s leverage).
Moreover, since the acquisition is not expected to close until mid-2013, analysts believe that General Motors Company (NYSE:GM) will still have at least $30 bn of cash + an $11 bn revolver available for other purposes.
The GM Financial transaction is essentially neutral to valuation, as General Motors Company (NYSE:GM) is deploying $2bn of cash, but is adding $2bn of Finco book value (analysts value captive finance companies at 1.0x book). It should be approximately $0.13-$0.17 accretive to EPS. Proforma annualized EBT for GMF is expected to be $1.1bn-$1.2bn (compared to $0.8bn as of 3Q12).
Captive finance companies not only allow automakers to finance customers to support sales, but also to increase brand loyalty. According to data from Experian Automotive, brand loyalty is higher via captive financing than non- captive financing. While that data is for the U.S., many believe that similar relationships hold in other regions.
This transaction should be accretive to the auto business, particularly in Europe. Analysts estimate GMF proforma leverage (net debt to equity) at ~3.5x, leaving the company significant flexibility to expand financing offerings in the market.
Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) analysts believe that this, and other recent developments significantly increase the probability that GM will seek to buy back a large portion of the US Treasury’s stake in the company.
Deutsche Bank analysts see at least 3 potential positives:
1) GM’s cost of offering subvented financing (i.e. low APR offers) will likely decline
2) Only 25% of General Motors Company (NYSE:GM)’s European sales are currently financed by the platform it is acquiring. They believe that by bringing this financing capability in-house, GMF will be able to enter new markets and make more competitive offers, ultimately increasing captive finance penetration to levels that are more in-line with VW’s 40%+ (resulting in incremental earnings at the Auto Company as well as the Finance company
3) They believe that GMF will develop leasing capability in Europe. GM currently has no leasing capability in Europe, putting them at a disadvantage to competitors.
