General Motors Co.'s valuation of its stake in Ally Financial Inc. implies that the common equity of the auto lender, formerly known as GMAC, is worth $6.9 billion.
The valuation of the company by its former parent underscores the challenges Ally faces in its efforts to repay the $17.2 billion it owes the Treasury Department. Ally is contemplating an initial public stock offering sometime next year, which will mark the first step in the unwinding of its federal bailout.
To be sure, Ally's value may be understated by GM.
"This is the closest to an 'insider' valuation of Ally that we have publicly available at this point, so that adds credibility," says Anant Sundaram, a professor at Dartmouth's Tuck School of Business who specializes in corporate valuation. "It is possible that GM's valuation of Ally errs on the conservative side, and we do know that there's the preferred stock that will convert to common, adding further value."
The Treasury owns $11.4 billion of preferred securities in Ally that will likely convert into common stock by the time of the public offering, increasing the government's equity stake, now 56.3%, to about 80%.
GM owns 6.7% of Ally's stock directly, and another 9.9% is in an independent trust; the auto maker scaled back its ownership in Ally as a condition of the auto lender becoming a bank-holding company. GM put the "fair value" of the 16.6% common equity stake in Ally at $1.14 billion as of June 30 in the auto maker's prospectus for its own IPO. GM said its valuation approach "provides our best estimate of the fair value of our investment in Ally Financial common stock," in its filing, dated Aug. 18.
GM's valuation of its 16.6% common equity stake in Ally extrapolates into a $6.9 billion price for all Ally's common shares. This would make the 56.3% the government currently owns in Ally common stock worth $3.9 billion, as of June 30.
As with almost any IPO, only a fraction of Ally's shares will be sold in its offering. One benefit for Ally when the government converts its preferred securities into common stock: Ally will not have to pay the 9% dividend on the preferred. It has paid $1.5 billion in dividends to the government on these securities through August.
"Investors will be sharing ownership of Ally with the government after the IPO," said J.W. Verret, a George Mason University law professor. "While bondholders may view this as a positive, the sentiment may not carry over to equity investors."
Ally internally expects it will not finish paying back its federal aid until the end of 2012, according to people familiar with the matter. The government will have to sell its shareholdings over months or years to be fully repaid, much as it is doing with Citigroup Inc. and plans to do with American International Group Inc. and GM. 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 largest customer.
"We are highly confident in our ability to repay the U.S. taxpayer in full over time based on significant analysis, including external advice we have received," says Gina Proia, a spokeswoman for Ally. "It is our top priority, and we believe we are on the right path."
Ally was bailed out by the government as part of efforts to rescue GM and Chrysler Group LLC.