Royal Bank of Canada announced Tuesday that it will pay a net price of $1.4 billion to acquire the Canadian auto finance and deposit business of Ally Financial Inc., which has been selling international assets in order to repay a U.S. government bailout loan.
The transaction comes after a bidding war that some reports said included TD Bank, among others.
RBC said its net cost for the deal will be about $1.4 billion, excluding excess capital to be acquired in the deal. Including excess capital, RBC will pay between $3.1 billion and $3.8 billion.
"Given the quality of the Ally business and the attractiveness of the industry - I think Ally reported that there were up to 15 bidders that started this process - I would characterize the interest in the Ally business as high and the competition was strong," said RBC personal and commercial banking president Dave McKay. "The reason we're comfortable in the price paid is if you look at the earnings profile and the multiple we paid on earnings ... it's accretive in year one. All of those point to good value for the business that we paid."
Ally Financial's Canadian unit provides financing to nearly 600 auto dealerships across the country. The finance company's consumer business has about 450,000 loans outstanding.
The assets are part of those of the former General Motors financing arm.
Royal Bank said that once the deal closes it will handle private auto loans in Canada that are subsidized by General Motors.
"We entered this deal with an agreement already made with GM, so we know where we stand and we factored that into the price of the deal," McKay said, adding that GM is re-entering the auto finance business themselves.
"We expect there to be four main providers of [underwriting] business in Canada. We will be one of them, GM will be one of them, and there will be two other Canadian banks."
The deal with Royal Bank, expected to close early next year, is part of Ally's plan to accelerate repayment of the $17.2 billion US bailout, but it was unclear exactly when the government would get more money. So far Ally has repaid $5.8 billion. The U.S. Treasury owns 74 per cent of Ally common stock plus $5.9 billion of preferred stock.
Earlier this week Detroit-based Ally Financial reached an agreement to sell its Mexican insurance business, ABA Seguros, to Swiss insurance company ACE Group for $865 million.
"We continue to evaluate options for our remaining international operations in Europe and Latin America, and we are encouraged by the progress and interest in the businesses," Carpenter added.
