Co. considers its $3.5 billion purchase of AmeriCredit Corp. a critical step towards boosting sales by reaching a broader group of customers – those with weaker credit scores and those who prefer to lease.
GM bought the Fort Worth, TX-based financer today in an all-cash transaction valued at $24.50 per share, a 24% premium over the closing price of AmeriCredit’s stock Wednesday. GM expects the deal to close in the fourth quarter.
Since emerging from bankruptcy last year, the auto maker’s executives have lamented the inability of dealers to get financing for buyers with lower credit scores ranging from 500 to 650, or roughly 28% of the U.S. credit market. A limited-lease portfolio also has affected GM’s competitiveness.
“Now we are going to fix that,” GM Chairman and CEO Ed Whitacre says during a conference call earlier today to detail the transaction with journalists and Wall Street analysts. “This is good for customers, dealers, GM and AmeriCredit.”
As GM hurtled towards bankruptcy during last year’s recession, so did its former captive financing unit GMAC. Both needed massive government investment to recover. To get back on its feet, GMAC pulled back on both sub-prime lending and leasing, sharply limiting GM sales in both areas.
Sub-prime customers account for about 4% of GM sales, the auto maker says, or roughly the industry average. GM’s lease penetration represents 7% of sales, compared with an industry average of 21%.
GM Chief Financial Officer Chris Liddell does not expect either of those percentages to rise significantly through ownership of AmeriCredit, but it will make a difference on the showroom floor.
“An extra percent here, an extra percent there makes a big difference from a sales perspective,” he says.
Liddell also says potential for GM branding of AmeriCredit leading products exists, and the transaction would allow it to re-enter the sub-prime market in Canada sometime in the future.
Buying AmeriCredit also makes sense for GM, he says, because the sub-prime-focused lender proved last year it could operate under unfavorable economic conditions. The auto maker’s rebound from bankruptcy focuses closely on profitability in both good and bad economies.
“AmeriCredit has demonstrated the ability to be successful in all scenarios,” Liddell says.
AmeriCredit posted a profit of $14 million in fiscal-year 2009, despite the weak new-vehicle and frozen credit markets. The results were a turnaround from a loss of $69 million in like-2008, when the capital markets collapsed.
Current management at AmeriCredit will remain intact, GM says, to minimize integration disruption. AmeriCredit also will continue to satisfy its cash needs in the capital markets independent of GM, which the auto maker believes will minimize risk to its newly cleansed balance sheet.
A spotless balance sheet from GM’s bankruptcy makes it most attractive to potential investors ahead of an anticipated initial public offering later this year.
The 24-year-old AmeriCredit currently holds $10 billion in assets and already serves some 11,000 car dealers in the U.S. through 14 offices. It works with about 4,000 GM dealers representing 15% of AmeriCredit overall business.
The auto maker will continue to work with GMAC, which renamed itselfFinancial Inc. earlier this year, in the prime lending market and obtaining financing for dealers to stock their showrooms.
However, Liddell says AmeriCredit will become the core source of financing for GM customers.
AmeriCredit expects to continue working with its non-GM customers and neither company expects those relationships to present any regulatory hurdles.
Whitacre says the purchase of AmeriCredit further demonstrates the new business model at GM. “We realized we had a gap that needed to be addressed. When this opportunity arose, we acted swiftly and decisively.”