General Motors (NYSE:GM) has decided to buy Ally Financial’s European, Latin American and Chinese operations in a deal estimated to be worth $4.2 billion.  With this acquisition, GM Financial’s assets would double to $33 billion. As part of the deal, GM will acquire Ally’s assets in Brazil, Mexico, Colombia, Chile, Germany, the United Kingdom, France, Italy, Belgium, the Netherlands, Sweden, Switzerland and Austria. Ally also has a 40% stake in its Chinese joint venture GMAC-SAIC which will also be acquired by GM.
Better, More Flexible Leasing and Loaning Options
The transaction will boost GM Financial’s earnings by $300 to $400 million before taxes. In-house financing provides the automakers the option to subsidize interest rates on loans or provide better leasing options for customers looking to buy their vehicles. Ally Financial is 74% owned by government and this is the company’s attempt to raise money and return its government bailout money of $17 billion. In-house financing in Europe could also help turnaround or improve its Opel unit, which is reeling in losses and is not expected to be profitable before the mid-decade.
GM is entering into a phase in which it plans to aggressively roll out new models globally so having the ability to offer a smorgasbord of lease/loan options could certainly provide an incentive for customers and help boost auto sales. Moreover, an improved brand image would give the automaker’s vehicles a higher reselling value and therefore lower the chances of residual risk. Residual risk is the probability that the amount GM Financial obtains from the returned vehicles may be lower than the expected residual value for the vehicle.
We currently have a Trefis price estimate of $26.90 for General Motors’s stock, which is about 5% higher than the current market price. We will update our model to incorporate the acquisition once the figures are officially released by the company.Notes: