Why Davidson Kempner adds new position in Ally Financial

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Davidson Kempner and Ally Financial

Davidson Kempner Capital added new positions in Ally Financial Inc. (ALLY), WL Ross Holding (WLRH), Newell Rubbermaid (or NWL), and B/E Aerospace (or BEAV). It exited positions in Equity Commonwealth (EQC), Omnicom (OMC), and JPMorgan Chase & Co. (JPM).

Davidson Kempner initiated a new position in Ally Financial Inc. (ALLY) that accounted for 5.5% of the fund’s 2Q14 portfolio. Ally Financial is currently the second largest position in the fund’s portfolio.

Market Realist previously reported that both Dan Loeb’s Third Point Partners and D.E. Shaw initiated positions in Ally Financial in 2Q14. Click here to read about D.E. Shaw’s position in Ally Financial.

Overview of Ally Financial

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Ally Financial is an automotive financial services company. It has ~95 years of experience. Ally provides a variety of financial products and services to automotive dealers and their customers. Ally was founded in 1919. Previously, it was General Motors’ (or GM) finance arm. At that time, it was called GMAC.

Treasury continues to sell its shares in Ally

During the financial crisis in 2008, the U.S. Treasury bailed out the lender for $17.2 billion under the Troubled Asset Relief Program (or TARP). The Treasury sold 95 million shares in Ally’s $2.38 billion initial public offering (or IPO) in April.

The Treasury announced that it would continue to decrease its investment in Ally by selling additional shares.

It recently sold 8,890,000 shares. It recovered ~$218.7 million for taxpayers. In a statement, the Treasury said that it holds 66.2 million shares of Ally’s common stock—or ~13.8%. The statement noted that taxpayers have recovered ~$18 billion on the Ally investment. This is ~$873 million more than the original $17.2 billion investment.

Ally’s strategy

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

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As part of that strategy, Ally has divested its international businesses. It also substantially exited the mortgage origination and servicing business. 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

Ally’s core 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 finances dealer floor plans. It also offers term loans and other lines of credit to dealers. Ally has fleet financing and vehicle re-marketing services.

The insurance operations offer consumer finance protection and insurance products. They’re sold primarily through the automotive dealer channel. It also offers commercial insurance products that are 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 long-standing relationship with General Motors. It also has relationships with other original equipment manufacturers (or OEMs)—including Chrysler Group LLC.

Ally Bank

Ally Financial also owns Ally Bank. It offers savings, checking, and other deposit products. The banking unit had ~784,000 customers and over 1.5 million accounts on December 31, 2013. It had $52.9 billion in deposits—including $43.2 billion in retail deposits—at the end of last year.

Second quarter results 

Ally’s 2Q14 results beat estimates. Adjusted earnings per diluted common share for 2Q14 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.

In the next part of this series, we’ll discuss Davidson Kempner’s new position in the special purpose acquisition company (or SPAC) WL Ross Holding (WLRH).

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