US To Boost Ally Stake By Converting Preferreds Before IPO-Sources
September 17 2010 - 4:15PM
Dow Jones News
The U.S. government is expected to raise its stake in auto
lender Ally Financial Inc. to 80% from its current 56%, say people
familiar with the matter. The move is the first step in the unwind
of a $17.2 billion bailout that could last until the end of
2012.
The U.S. won't be putting more money directly into Ally. Rather,
people familiar with the matter say, it will likely convert $11.4
billion in preferred securities it holds in Ally, formerly known as
GMAC, into common stock, boosting its stake in the company. The
conversion would be made by the time of Ally's initial public stock
offering, expected some time next year. The Treasury Department
also has a $2.7 billion debt investment in Ally.
The government will have to sell its shareholdings over months
or years to be fully repaid, much as it is doing with Citigroup
Inc. (C) and plans to do with American International Group Inc.
(AIG) and General Motors Co.
Ally repaying the Treasury in 12 to 18 months "isn't a
reasonable expectation," says Mark Wasden, an analyst at Moody's
Investors Service. Ally internally expects it won't finish paying
back its federal aid until the end of 2012, according to people
familiar with the matter.
The money it ultimately realizes will depend on Ally's operating
results and the market's evaluation of them. Ally must prosper in a
troubled market for auto sales, while facing a shifting alliance
with GM, its former owner and largest customer.
Ally spokeswoman Gina Proia said, "Ally is on the right
trajectory and we are confident in our ability to repay the U.S.
government's investment in full over time." A Treasury Department
official declined to comment.
One indication of the challenges facing Ally in paying off the
government's bailout: When GM bid for the heart of Ally's auto
operations in mid-June, the auto maker only offered $5 billion, say
people familiar with the matter.
This low price would have made it impossible for Ally to repay
its federal aid. Ally's board rejected the bid.
Ally, once a lender owned by GM and subsequently majority-owned
by private-equity investors, became a bank holding company at the
end of 2008 to survive the credit crisis. The change made it
eligible for the federal aid it received. It was bailed out by the
government as part of efforts to rescue GM and Chrysler Group
LLC.
As with almost any IPO, Ally will sell a fraction of its shares
in its initial public stock offering. One benefit the government
will lose when it converts its preferred securities into common
stock is the 9% dividend Ally pays on the preferred; Ally has paid
$1.5 billion in dividends to the government through August.
Certainly GM didn't put a high value on Ally in June when it
placed its bid. Chief Executive Michael A. Carpenter learned of
GM's bid from a phone call in his car, says a person familiar with
the matter. Carpenter, this person says, was surprised by GM's low
bid of $5 billion for the heart of Ally's auto operations,
including its prized business of lending to auto dealerships but
excluding retail auto lending.
Kim S. Fennebresque, an Ally board member appointed by the
Treasury, says: "We understand the value in our business and
accepting a proposal that would effectively destroy that value made
no sense. There was absolutely no benefit for the taxpayer."
After Ally's rejection, GM never came back with a revised offer.
On the morning of July 22, Carpenter got a call from a senior GM
executive to say the auto maker was buying subprime auto lender
AmeriCredit Corp. (ACF) for $3.5 billion, says the person familiar
with the matter. AmeriCredit, though small now, could eventually
compete with Ally, many analysts say.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com
(Sharon Terlep in Detroit and Meena Thiruvengadam in Washington
D.C. contributed to this report.)
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