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GM to buy Subprime Lender, AmeriCredit
Thursday, July 22, 2010
Tags: Automotive news
GM Agrees to Buy Lender AmeriCredit for $3.5 Billion
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. 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. 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. 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 a new, in-house banking unit proved too difficult at that point, they said. “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.” 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 automaker gets about 4 percent of its sales from subprime borrowers, compared with about 7 percent for the industry as a whole, said Chief Financial Officer Chris Liddell when revealing the acquisition in a briefing today at GM headquarters in Detroit. Similarly, the company sells 7 percent of its cars through leasing programs, compared with 21 percent for the industry, he said. Liddell said GM can grow 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.”
GM has worked with AmeriCredit since September 2009, boosting its penetration into the subprime consumer market, he said. Since 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,” he said. Mike Jackson, CEO of AutoNation Inc., told financial news network CNBC that he was “all smiles” about the deal. “I wouldn’t run an automotive manufacturer without a captive financing arm,” Jackson said in the interview.
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.”