Reuters: Ally Eyes IPO, but Bankers Pitching a Sale: Sources

U.S. auto lender Ally Financial Inc is planning an initial public offering that could raise $2 billion to $4 billion as soon as early next year, sources told Reuters.

(Reuters) – U.S. auto lender Ally Financial Inc (ALLY_pb.N: Quote, Profile, Research, Stock Buzz) is planning an initial public offering that could raise $2 billion to $4 billion as soon as early next year, sources familiar with the situation said.

Ally’s management, including Chief Executive Michael Carpenter, believe an IPO is the quickest way for the company to repay the U.S. government, which it owes about $11 billion after three bailouts amid the 2007-09 financial crisis.

But some bankers, who have not been hired by Ally, are urging the lender to first sell tens of billions of dollars worth of its estimated $87 billion auto loan portfolio before looking for a buyer for the rest of the slimmed-down company, such as Capital One Financial Corp (COF.N: Quote, Profile, Research, Stock Buzz) or U.S. Bancorp (USB.N: Quote, Profile, Research, Stock Buzz).

The bankers, who have independently run Ally’s numbers, said a sale would offer better prospects of repaying the government than an IPO because of increased competition in the auto loan market, where lending margins are shrinking. Banks that were stung by mortgages are more willing to make car loans now because auto loans performed well during the crisis.

“The big question mark is: how do they grow the business on a longer-term basis?” said Jody Lurie, a corporate credit analyst with Janney Montgomery Scott.

Executives at Ally, the former finance unit of General Motors (GM.N: Quote, Profile, Research, Stock Buzz) known as General Motors Acceptance Corp (GMAC), are evaluating all of their options but are skeptical of the bankers’ proposals, which they think will be hard to complete, take time and not necessarily fetch more money, according to a source familiar with the company.

Ally has already sold billions of dollars of assets and shrinking further might affect its customer relationships and value, said a source familiar with the company as well as another person close to the Treasury, which owns about 74 percent of Ally’s common shares. The sources requested anonymity as the conversations were private.

In an emailed statement on Tuesday, Ally said it offers a wide array of products, better service than rivals and has been in the sector for a long time.

“We believe there are sufficient growth opportunities,” it said.

U.S. Bancorp declined to comment while calls to Capital One were not returned. A Treasury spokesman also declined to comment.

BANKER PITCH
Ally is the biggest bank holding company that still owes money to the U.S. Treasury after its $17.2 billion bailout.

Over the past 18 months, Ally has sold off much of its international operations, raising $6.7 billion as of May. In the coming weeks, Ally plans to resubmit its capital plan to the U.S. Federal Reserve as part of annual tests of banks’ ability to withstand a severe economic downturn, the sources said. It was one of two banks to fail the stress tests earlier this year.

Ally plans to ask the Fed to approve a plan to repurchase $5.9 billion of preferred shares owned by the U.S. government, which will take its debt to Treasury down to an estimated $5 billion. The company expects the Fed would give it the green light on its capital plan this fall, the sources said.

The Treasury is keen to shed its investment in Ally, which scotched plans to raise around $6 billion in an IPO in 2011 amid rocky markets and problems with its mortgage subsidiary, Residential Capital.

Ally has since put ResCap in bankruptcy and cleared the last hurdle to shedding that liability in June.

Excluding ResCap and the international asset sales, Ally’s net revenue rose to $1.02 billion in the first quarter of this year from $748 million in the first quarter of 2011.

A sale of Ally would need approval from regulators who currently frown on large bank deals, worried that they would turn the buyer into a bank that is too big to fail, or make a colossal bank even bigger and riskier.

Wells Fargo & Co (WFC.N: Quote, Profile, Research, Stock Buzz) has been approached by bankers to buy Ally, but the bank did not show any interest, one of the sources said. Wells Fargo declined to comment.

Another possible merger partner for Ally is CIT Group Inc (CIT.N: Quote, Profile, Research, Stock Buzz), which lend to small businesses, bankers have said.

A CIT spokesman declined to comment.

“When you look at the two, they don’t do the same thing, but they have similar lines of businesses and it wouldn’t be too hard to think of the two of them teaming up,” said Janney Montgomery’s Lurie. “I think Ally’s first priorities are to IPO, pay off Treasury, pay off its debt load and buying a company like CIT could be its three-year plan.”