Is Whitacre creating his own empire, just as he did at SBC, in effect reassembling AT&T ?
General Motors Company and AmeriCredit Corp. (NYSE: ACF) today announced they have entered into an agreement for GM to acquire AmeriCredit, an independent – and more importantly successful – auto finance company in an all-cash transaction valued at about $3.5 billion.
The acquisition creates a new GM captive financing arm that will enable GM to provide potential customers with more credit options. GM claimed it would not change its current incentive plans in the U.S., which are among the industry’s highest. If true, this means that taxpayers would not incur increased costs from more of the kinds of subsidized financing that auto companies often use to bolster sales.
Thus far this year GM sales are not increasing as fast as the overall market. Auto companies continue to incur loses because of overly optimistic residual values for returning lease vehicles.
GM said it needs to provide financing to “non-prime” customers – 40% of the U.S. population but only 4% of its current car buyers – who are remain pariahs in the credit markets despite lavish taxpayer financed bailouts of Wall Street firms and big banks that totaled almost a trillion borrowed dollars – and were designed to free up credit, according to the Obama Administration.
Under the terms of the agreement approved by both companies’ boards of directors, AmeriCredit shareholders will receive $24.50 in cash for each share of stock held as of the closing date, which is due by the end of the fourth quarter of 2010, pending various conditions, including the approval of AmeriCredit shareholders
GM’s proposed purchase price is about a 25% premium over AmeriCredit’s closing share price on Wednesday. AmeriCredit has traded for as high as $26.49 a share this year.
“Adding AmeriCredit to our team will improve our competitiveness in auto financing offerings, and I am very pleased to have them on board,” said GM Chairman and Chief Executive Officer, Ed Whitacre about the Texas based financing company.
GM claimed it will maintain its relationship with Ally Financial, the renamed GMAC, which is and now an independent taxpayer-owned company that provides retail and wholesale financing to GM and Chrysler Group. Currently GM has 57% of its transactions in the retail prime market through Ally and other banks, above the industry average of 53%.
“Long term, this transaction will deliver benefits to our dealers, customers and employees,” said AmeriCredit President and Chief Executive Officer Daniel Berce.
The AmeriCredit management team will remain intact for the moment, and “will assist in minimizing integration risk and maximizing opportunities between the two companies,” GM said in a statement.
Upon completion of the transaction, AmeriCredit intends to re-enter the leasing business, which will provide expanded leasing availability for all GM customers. Currently GM sales are running at about 7% leasing, while the industry is leasing at an average of 21%.
The key here for GM is the consistent availability of non-prime financing for potential customers throughout all economic cycles, an increasingly important concern in what looks to be a stalled U.S. economy that shed more than 8.5 million jobs during 2008 and 2009 and has official unemployment rates of almost 10%.
AmeriCredit already has relationships with approximately 4,000 GM dealers and 7,000 others, and is rated in the low-B range, which is non-investment grade for a company with a $10 billion in assets on its balance sheet. GM now has $30 billion cash on its balance sheet, partially the post-bankruptcy result of the shedding of huge interest costs on the wiped out debt of the old GM Corporation.
There are clear benefits for AmeriCredit shareholders, who are being offered the equivalent of 16 times expected 2011 net earnings. For privately-held GM, its huge losses can be applied to AmeriCredit profits going forward, shielding earnings from taxes.
“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.