GM Drops $3.5b On Subprime Lender AmeriCredit

After months of speculation about GM’s re-entry into the subprime lending market, The General has announced a deal in which it will purchase the lender AmeriCredit for $3.5b. Founded in 1992, and managing assets worth $10b, AmeriCredit has been pursued by GM for the last month, according to GM CFO Chris Liddell in the WSJ [sub]. GM paid AmeriCredit stockholders $24.50 per share for a controlling interest in the firm, a 24 percent premium over its $19.70 closing price yesterday. Still, GM insists that acquiring AmeriCredit will have “a minimal impact” on its balance sheet, although no explanation is given as to how. $3.5b is at least ten percent of GM’s cash pile at this point, and it’s not clear if that qualifies it as a “minimal impact” or if GM is using some kind of financial instrument to purchase the firm. AmeriCredit says it will “expand its offerings” to support GM, likely in the area of lease deals, but it will also continue to offer loans to non-GM-brand car deals.

Meanwhile, the debate over GM’s re-entry into the subprime market will likely to continue generating controversy. Subprime lending has long been a preferred method of maintaining sales growth through periods of slow demand, but analysts warn that there’s very little that automakers can do to turn around the soft underlying demand for cars. GM’s response [via AP/Google]:

Liddell said that customers could now expect more lease deals from GM. Only 7 percent of its sales are from leases, compared with 21 percent for the industry, he said. Only 4 percent of GM’s sales come from subprime buyers, which the company hopes to expand with its AmeriCredit acquisition.

With 40 percent of the new car market estimated to have a credit score of 620 or under (the definition of subprime), there’s no doubt that GM can move some metal with the help of AmeriCredit. But what if the overall economy and unemployment in particular stay low? If GM signs a load of new subprime loans, default risks could start piling on. And though GM has room to grow its leasing business (particularly at Cadillac), it’s led the industry in cash incentives for most of this year, suggesting that no amount of financial wizardry will restore demand to the levels its looking for. If this deal helps GM wean itself off its incentive addiction, it will have been worth it. If the idea is to pile on incentives, lease deals and subprime loans in order to redline demand for its vehicles ahead of an IPO, GM could be setting itself up for a big fall. And with plenty of demands on its cash already, one big stumble could become a big problem on short notice.