General Motors Co.
) set to expand its geographical presence in a strategic deal
with Ally Financial Inc., whereby the former will buy all of the
latter's auto-finance business operations in Latin America and
Europe along with a 40% stake in China.
The hefty deal is valued at $4.2 billion, a premium of $550
million to the tangible book value of $3.7 billion. Subject to
regulatory approval and other customary conditions, the deal is
expected to culminate in phases in 2013.
Ally Financial has been facing the brunt of the economic
turmoil, as a result of which it is 74% owned by the US
government and is indebted to it by $17.2 billion. Hence, the
company had disclosed its intention of divesting two-third of its
business in May this year in order to shore up its repayment
process. However, the decision to abandon its China operations
has been taken later.
Additionally, Ally Financial has agreed to sell its Canadian
unit to Royal Bank of Canada for $4.1 billion in cash. It also
inked a deal with
) to sell its Mexican insurance business for $865 million.
Nevertheless, all the deals have been valued at a substantial
premium, which again justifies the company's divestments.
On the other hand, the current deal suits General Motors' plan
of international expansion. Currently, North America has been the
company's primary revenue generating zone, while the new
locations added by this purchase will cover 80% of the company's
revenue from global markets. The addition of Ally Financial's
assets will not only help General Motor to diversify into
international markets, but will also boost its competitive and
operating leverage, thereby helping the company regain its
historical superior position. The acquisition will also improve
General Motors' own financing arm, balancing it well with
external bank partners.
The new acquisitions are also part of General Motors'
long-term growth strategy of focusing on emerging markets,
particularly Brazil, China and India, to recoup its global sales
by increasing its capacity investment to meet growing demand. Now
that the worse is behind, based on stable macroeconomic
conditions and pent-up demand in the automotive sector, General
Motors expects to launch 23 new vehicles in Europe along with
more products in its global markets.
While General Motors is also partially owned by the US
government currently, we remain concerned about the company's
rising debts due to which the debt-to-capitalization ratio rose
to 28.6% at the end of September 2012 from 26.6% in the year-ago
period. Nevertheless, higher operating cash flow and free cash
inject some confidence for long-term growth. Currently, General
Motors carries a Zacks #3 Rank, which implies a short-term Hold
rating on the stock.
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