GM to buy AmeriCredit for $3.5 billion

DETROIT (Reuters) - General Motors Co said on Thursday it would buy auto finance company AmeriCredit Corp for $3.5 billion in a cash deal aimed at boosting sales and removing an investor concern before a planned IPO.

The deal would give GM an in-house lending arm for the first time since it sold a controlling stake in GMAC in 2006.

The move represents a reversal for GM, an admission that the strategy of past management had failed and a bet that the government-owned automaker can improve returns for taxpayers by drawing down part of the cash cushion left from its bailout.

Many GM dealers have complained that lack of financing options for consumers has cost them sales in a U.S. auto market stuck in a slow grinding recovery.

GM is preparing for an initial public offering later this year, people familiar with those discussions have said.

Analysts said the AmeriCredit deal addresses a concern about a risk to GM's sales momentum as it prepares for a stock offering to lower the government's nearly 61 percent stake.

But by taking auto financing, including lease underwriting, back in-house, GM is taking on new risk by stepping back into an area that burned the automaker and forced it to take massive charges as recently as 2008.

"It is going to be much more beneficial for GM to have a captive finance arm when they go to do their IPO. Without it, it puts them at a disadvantage," said Autoconomy.com analyst Erich Merkle.

Mike Jackson, chief executive of the No. 1 U.S. auto dealership group AutoNation , said the AmeriCredit deal shows that GM is executing on its turnaround plan.

"I have said it to anyone and everyone who would listen," Jackson told Reuters. "I wouldn't run an auto manufacturer without a captive finance company. I think it's that strategically crucial."

GM plans to pay AmeriCredit stockholders $24.50 per share. AmeriCredit's shares rose 21 percent to $24.07 on Thursday.

'CORE' OF A NEW FINANCE ARM

AmeriCredit, which has $9 billion in auto loans, would become the "core" of a new GM finance arm, the company said.

GM ended the first quarter with $36 billion in cash and securities. It will pay for AmeriCredit with that cash, funding left over from the Obama administration's $50 billion bailout.

U.S. officials have said repeatedly that they would not interfere with decisions by the GM board. A spokesman said the U.S. Treasury had been notified in advance of the deal but played no role in the decision.

"In line with the principles that guide the government's role as a shareholder, Treasury was not involved in this decision," said Treasury spokesman Mark Paustenbach.

GM CEO Ed Whitacre said the automaker recognized it could not compete without owning its own lending arm. That reverses a stance that dates to 2006 when it was scrambling to raise cash to restructure outside bankruptcy.

"We were not as competitive as we could be, and it hurt our ability to meet rising demand for GM cars and trucks," Whitacre said. "Now we are going to fix that."

GM management moved to close the AmeriCredit deal quickly when it was presented, Whitacre said. GM expects the deal to close in the fourth quarter.

An earlier plan GM officials had considered would have seen the automaker take back the auto financing operations of GMAC, essentially combining parts of two government-owned firms.

Detroit-based GMAC, now known as Ally Financial, is 56-percent owned by the U.S. Treasury after the government injected $17 billion as part of a restructuring that also saw the finance company become a commercial bank.

Other major automakers, including Ford Motor Co and Toyota Motor Corp <7203.T>, have in-house financing arms they use to provide loans to dealers and car buyers.

GM's move leaves Chrysler, controlled by Fiat SpA , the only large automaker without a dedicated financing arm.

'BUILDING BLOCK' TO IPO

GM Chief Financial Officer Chris Liddell said the deal would help GM repay its taxpayer investment by providing a "building block" toward a more successful IPO.

Meanwhile, GM will continue its relationship with Ally Financial , formerly GMAC, and other commercial banks in the market for lending to credit-worthy borrowers, he said.

With Fort Worth, Texas-based AmeriCredit operating as part of GM, the automaker expects to offer more loans to subprime buyers and to sell more vehicles on lease.

Through June, about 4 percent of GM's retail sales were to "nonprime" buyers, the automaker said. A subprime borrower is generally defined as a customer with a credit score below 620.

Meanwhile, GM leased only 7 percent of vehicles it sold in the first half. The industry average was 21 percent.

With AmeriCredit, GM's sales to subprime customers could rise to 5 percent or 6 percent of sales, Liddell said. Lease rates will also rise, he said. "A percent here and a percent there will make a big difference for our sales," he said.

GM's U.S. sales rose 14 percent in the first half of 2010 from a year ago, beneath industry growth of almost 17 percent.

(Reporting by Kevin Krolicki and David Bailey in Detroit, David Lawder in Washington; Editing by Gerald E. McCormick, Maureen Bavdek, Robert MacMillan, Leslie Gevirtz)

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