General Motors Co. (GM - Analyst Report) 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 Ace Ltd. 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.