GM takes another step to sever ties with the former GMAC, now known as Ally Financial.
General Motors has announced it will use a new public offering to sell off $1 billion in preferred stock in Ally Financial Inc. — further distancing itself from its long-time in-house lending arm.
The shares represent 100% of the outstanding Series A preferred stock for Ally, which used to be known as GMAC, for decades the so-called “captive finance subsidiary” of the Detroit automaker. GM gave up control of GMAC in 2006 and has since taken steps to expand its sources of automotive lending.
“Today, we are taking another step forward in our strategy to strengthen and simplify the company’s balance sheet,” said Chris Liddell, GM outgoing vice chairman and chief financial officer.
The transaction will result in a book gain of $300 million to be recorded in the first quarter of 2011. Following the sale, GM’s investment in Ally Financial will consist of a 9.9% interest in Ally common stock. GM reportedly passed on an opportunity to exchange the preferred shares for more equity in Ally Financial, which was originally known as General Motors Acceptance Corp.
The offering was underwritten by Credit Suisse, BofA Merrill Lynch, Deutsche Bank Securities and Barclays Capital and is expected to close in the next few days.
GM earlier sold a majority stake in the then-GMAC to Cerberus Capital Management, the New York equity firm that had grand ambitions of becoming a major player in the automotive industry. Cerberus also purchased Chrysler and a number of automotive suppliers. The capital management firm then saw many of its holdings collapse during the 2009 industry meltdown.
Ally ultimately required a $17.2 billion federal bailout, in turn transferring 74% of its equity to the U.S. Treasury. It is expected to hold an IPO, later this year to sell off the government stake.
Earlier this month Ally Financial Inc. announced that the U.S. Department of the Treasury got $2.7 billion from the sale of all its Trust Preferred Securities that the Treasury held in Ally.
In addition to the proceeds from this transaction, Ally has paid approximately $2.2 billion in dividends on the Treasury investment to date.
“This transaction marks a key step in the company’s plan to repay the U.S. taxpayer in full,” said Ally Chief Executive Officer Michael A. Carpenter. “We are grateful for the taxpayer’s investment in the company during the financial crisis, which enabled Ally to play an integral role in the U.S. auto recovery and ensure that thousands of automotive dealers and millions of consumers had access to credit.”
“We are encouraged by our progress to date, and our ability to support the auto industry for the long term. We are committed to repaying the remaining investment to the U.S. taxpayer over time,” he said.
GM has had a tense relationship with Ally since it lost control of the lender. Ally all but stopped offering automotive loans during the depth of the downturn, complicating GM’s own recovery efforts. As a result, it purchased AmeriCredit, last October, to help expand the ability of leasing and sub-prime loans.
GM is expected to now seek additional sources for “floor planning” used by dealers to support their own vehicle purchasing.