GM buys subprime lender for $3.5 billion

NEW YORK (CNNMoney.com) -- General Motors is paying $3.5 billion in cash to buy subprime auto lender AmeriCredit, a move that will once again give the automaker its own finance arm.

It is the first major acquisition for GM since it emerged from bankruptcy a year ago with the help of a $50 billion bailout by U.S. taxpayers.

GM will pay $24.50 a share for AmeriCredit (ACF), which represents a 24% premium over Wednesday's closing price. The Fort Worth, Texas-based finance company typically finances low-mileage, late-model used cars to customers without good credit.

Shares of AmeriCredit shot up 22% in Thursday trading following the announcement.

Treasury owns 61% of the company. While GM completed repayment of a $7 billion loan from Treasury in April, recouping most of the bailout dollars will depend on the value of the company when it once again starts selling shares to the public.

GM is expected to go public again later this year or early in 2011.

An official with Treasury said that while the department was notified of the acquisition decision, GM is not required to seek the government's approval for any investments, and that Treasury was not involved in negotiations. Treasury did not have any comment on the deal.

GM used to have its own finance arm, GMAC, which in addition to making auto loans and providing finance to its dealers was a major subprime mortgage lender. But it sold a majority stake in GMAC in 2006, partly because GM's junk bond rating from credit agencies made it expensive for the finance firm to raise necessary capital.

GMAC's problems with both auto finance and subprime mortgages ended up necessitating its own $17 billion bailout from the Treasury, which now owns 56% of its common stock as well as $10.1 billion in preferred shares.

GMAC, which recently changed its name to Ally Financial, makes loans to both customers and dealers of GM as well as Chrysler Group. But its own need to improve the quality of its loan portfolio has limited its willingness to make subprime auto loans and leases to car buyers of the two companies.

The difficulty that potential car buyers with bad credit have getting loans is one of the factors that has kept auto sales depressed. Customers who want to use leasing to lower their payments have also had difficulties arranging that form of financing, since leasing requires the finance company to assume risks about the future value of the vehicle.

Industrywide sales in the first half of this year were up about 17% from a year ago, but they are still down 32% from the first half of 2008 -- a period when sales were already being hit by the start of the recession and record high gasoline prices.

Just as easy financing created a bubble in home purchases, it led to a boom in car sales. But car sales are not likely to return to the peaks of the last decade any time soon.

There has been talk in the industry that the lack of a private finance arm has put GM and Chrysler at a competitive disadvantage with Ford Motor (F, Fortune 500) and Toyota Motor (TM), which both still own and operate finance arms.

"Not having an in-house finance arm hurt our ability to finance certain loans and leases, which in turn hurt our sales," said GM Chairman and CEO Ed Whitacre in a conference call Thursday.

GM estimates that about 4% of its retail U.S. sales have been subprime loans, and 7% have been leases. Industrywide, roughly 7% of new car sales are through subprime loans and 21% are lease, according to figures from sales tracker Edmunds.com.

But there are risks involved with GM getting into the business of again making its own loans to less creditworthy buyers -- especially since the market for investors buying those loans is still a fraction of what it was before the late 2008 crisis in financial markets.

Bill Visnic, senior editor for Edmunds, said that while there's clearly a potential for increased sales for GM in subprime loans and leases, it shouldn't be assumed that there will be an immediate spike in sales, especially since approval rates for subprime loans are still only a fraction of what they used to be.

"It's wise to proceed with a little caution. We can't all just declare this tight credit situation is over," he said. "Auto sales are still in sputtering stage."

Chris Whalen of Institutional Risk Analytics said in a note to clients Thursday that he saw the deal as a positive for GM but a negative for Ally.

"The GM business was not viable witthout a captive finance unit," he wrote. "Unfortunately for GMAC/Ally, GM has chosen to work with another credit provider. This suggests to us that GMAC will become just another provider of consumer credit in an already overbanked market."

Ally will continue to provide most of the auto loans to GM buyers with good credit, as well as the financing for its dealers, said GM spokeswoman Reneé Rashid-Merem. She said the AmeriCredit deal is designed to give GM additional financing offers for potential customers.

GM said its purchase of AmeriCredit "establishes the core of a new GM captive financing arm that will enable GM to provide customers with a more complete range of financing options." It pointed to the need to make loans to car buyers with subprime credit scores as well as offering leasing options.

The automaker's balance sheet was greatly improved by the bankruptcy process it went through a year ago, leaving it with $23.5 billion in cash and only $5.3 billion of long-term debt.