Why Third Point Partners buys a large stake in Ally Financial

Third Point Partners and Ally Financial

Dan Loeb’s Third Point Partners added new positions in Ally Financial (ALLY-B), Rackspace Hosting (RAX), IAC/InterActiveCorp (IAC) and FMC Corp. (FMC) last quarter. Notable exits included Verizon Communications (VZ), Cabot Oil & Gas (or COG), and International Paper (or IP).

Third Point Partners initiated a new position in Ally Financial (ALLY-B) last quarter. The new position accounts for 13.4% of the fund’s total second quarter portfolio. It’s the second largest position in the fund’s portfolio. The fund revealed in an investor letter back in January that it had accumulated a 9.5% stake in Ally. The Detroit-based auto lender saw an initial public offering (or IPO) earlier this year.

Treasury to decrease its investment more

Ally Financial was founded in 1919. Previously, it was General Motors’ finance arm. It was called GMAC. It’s an automotive financial services company with ~95 years of experience. Ally provides a variety of financial products and services to automotive dealers and their customers.

The U.S. Treasury bailed out the lender for $17.2 billion under the Troubled Asset Relief Program (or TARP) during the financial crisis in 2008. The Treasury sold 95 million shares in Ally’s $2.38 billion initial public offering (or IPO) in April. The Treasury currently holds 75,065,340 shares, or ~16% of Ally common stock. It recently announced that it would continue to decrease its investment in Ally by selling additional shares.

A release said taxpayers have now recovered ~$17.8 billion on the Ally investment. This is roughly $650 million more than the original $17.2 billion investment.

In its IPO filing, Ally said that it has undergone a strategic transformation from a captive finance subsidiary into a focused category leader in U.S. automotive finance. It has streamlined its operations, de-risked its balance sheet, and enhanced its focus on increased risk-adjusted returns.

As part of that strategy, it has divested its international businesses. It also exited the mortgage origination and servicing business substantially. Ally’s mortgage subsidiary Residential Capital, or ResCap, filed for bankruptcy in May 2012. Its liquidation plan was approved in December last year.

Ally’s core operations are Dealer Financial Services

Ally’s primary operations are conducted within Dealer Financial Services. It consists of automotive finance operations and insurance operations. The operations offer a wide range of financial services and products to retail automotive consumers and automotive dealerships.

The automotive finance services include providing retail installment sales financing, loans, and leases. It also offers term loans to dealers, finances dealer floor plans, and other lines of credit to dealers. Ally also has fleet financing and vehicle remarketing services.

The insurance operations offer consumer finance protection and insurance products sold primarily through the automotive dealer channel. It also offers commercial insurance products sold to dealers.

Ally served the financial needs of ~16,000 dealers in the U.S. and approximately four million retail customers as of December 31, 2013. Ally has a longstanding relationship with General Motors (GM). It also has relationships with other original equipment manufacturers (or OEMs), including Chrysler Group LLC.

Ally Bank

Ally Financial also owns Ally Bank. Ally Bank offers a full spectrum of innovative savings, checking, and other deposit products. It provides Ally with stable and diversified funding. Its direct bank business model caters to the expanding population of technologically comfortable consumers who are adopting digital technologies to meet their banking preferences.

It had ~784,000 customers and over 1.5 million accounts on December 31, 2013. Ally Bank had $52.9 billion of deposits, including $43.2 billion of retail deposits, at the end of last year.

Second quarter results driven by auto finance franchise

Ally’s second quarter results beat estimates. Adjusted earnings per diluted common share for the quarter were $0.42—compared to $0.34 for the previous quarter and a loss of $0.13 for the same period last year. Ally’s adjusted net financing revenue was up 32%. It said results for the quarter were primarily driven by strong performance from the auto finance franchise.

An increase in operating lease revenue for automotive finance operations was driven primarily by higher lease asset balances. The higher lease assets balance were a result of strong origination volume and increases in lease remarketing gains. The remarketing gains were driven by strong used vehicle prices and increased termination volume. Consumer financing originations increased to $10.9 billion—up 11% year-over-year (or YoY). This was the second highest quarterly originations total in Ally’s history.

Retail deposits for Ally Bank grew to $45.9 billion—up $6.1 billion or 15% YoY. The release said that unprecedented weather-related losses in the insurance business impacted the results. The YoY comparison was impacted by the non-recurrence of a $1.6 billion one-time charge taken in 2Q13. The charge was related to the comprehensive settlement agreement in the ResCap Chapter 11 bankruptcy case.