Wells Fargo, CIT a Good Fit for Ally: KBW

NEW YORK ( TheStreet) -- Bailed out lender Ally Bank may be a good fit for Wells Fargo ( WFC), JPMorgan Chase ( JPM) and CIT Group ( CIT), among a host of potential suitors as an initial public offering of the government-owned bank dims, according to KBW analysts.

Ally, once the auto-finance arm of General Motors ( GM), received multiple bailouts during the financial crisis totaling $17 billion, which represents a big chunk of the auto industry bailout. With a $6 billion IPO of Ally Bank less likely, the U.S. Treasury may look for private buyers in a split or sale of the company to unload its current 73.8% stake in the lender, according to KBW.

The company's three units work together with Ally Bank deposits providing funding to an auto lending unit while its insurance arm is an added in-dealership product. However, a government breakup may split the units into separate sales, according to KBW and Feb. 17 Reuters reports of a possible sale instead of an IPO.

Ally Bank could see strategic interest from lenders like CIT Group, who would find the banks roughly $1 billion in deposits to be a strong funding source for their commercial lending businesses, similar to the unit's present role in financing auto sales, according to KBW. Additionally, Ally Bank could draw interest from a traditional bank looking to bolster deposits to fund banking assets like consumer, business and mortgage loans. Overall, Ally Bank may sell at a premium to its deposit size. "We calculate that the maximum value would roughly be a 2% deposit premium, which equates to a purchase price of around $1 billion," write KBW analysts

The auto finance unit of Ally Bank may garner the attention of some of the largest U.S. banks like Wells Fargo, JPMorgan, Capital One ( COF), Discover Financial Services ( DFS), Huntington Bancshares ( HBAN) and US Bank ( USB), all with the balance sheets to make a sizeable acquisition, according to KBW. At the end of 2011, the North American auto finance unit had $54 billion in consumer loans and leases and an additional $32 billion in dealer loans, according to its financial statements. KBW analysts also note that the once GM-owned car lending arm still has operates in 74% of the company's dealerships and in 63% of Chrysler dealerships. With both General Motors ( GM) and Chrysler reporting strong sales growth, Ally Bank's auto finance assets may warrant a premium-priced takeover, with Wells Fargo potentially seeing the most benefit, according to KBW.

Wells Fargo shares have gained over 13% year-to-date, after sliding over 10% in 2011. Competitors like Bank of America, JPMorgan and Capital One have gained more in 2012 on an easing of the European debt crisis, a resolution to some mortgage litigation issues and M&A.

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For more on Wells Fargo and U.S. banks, see the financial stocks bought and sold by hedge funds and 7 bank stocks loved by Deutsche Bank.

"We believe that Wells Fargo is one of the few large banks with the interest and balance sheet to take down the entire business," writes KBW.

The bank research firm calculates that a buyout of the whole unit would cost $2.1 billion, roughly a 5% premium to its book value. Such a move would add 7% or 20 cents, to Wells Fargo's 2012 earnings per share, lifting overall earnings to $3.05 a share, and adding an additional 19 cents to 2013 EPS.

"Overall, we believe that the market would view this as a good deal for Wells Fargo if it were completed given the accretion and relative size," writes KBW.

GM may also look to re-buy Ally's auto lending operations to help its dealers provide sales-generating auto loans, according to Reuters. In 2010, GM bought subprime auto and truck lender AmeriCredit for $3.5 billion and renamed the unit GM Financial. Ford Motors ( F) currently operates a full-service lending unit called Ford Motor Credit.

Ally Bank's insurance unit has the most well documented sale plans, with reported interested parties that include Warren Buffet-run Berkshire Hathaway ( BRK.A), however the business has been a hindrance to the Treasury's IPO plans, as its ResCap mortgage unit faced increasing litigation tied to its foreclosure and loan modification practices in 2011. In February, Ally Bank and four of the nation's largest banks including JPMorgan, Bank of America ( BAC), Wells Fargo and Citigroup ( C) agreed to a $25 billion settlement on the litigation. That litigation iced a June 2011 IPO plan that was reported to include $6 billion of shares.

Bidders interested in ResCap include Fortress Investment Group ( FIG), Cerberus and a co-bid from Centerbridge Partners and Leucadia National ( LUK), according to Reuters. In December, Bloomberg reported that Berkshire Hathaway may take an equity stake in the unit, which if facing a restructuring. With $500 million in Ally and ResCap bonds, Berkshire is one of ResCap's largest creditors. Overall, the unit's largest bondholder is Pacific Investment Management. An equity stake in ResCap may come via a pre-packaged bankruptcy where bonds are converted to share holdings.

Previous Ally owners like Cerberus, which had large Ally stakes prior to government bailouts still have significant share positions. Cerberus owns 8.9% of Ally Bank, while General Motors Trust has a 5.9% stake and General Motors has a 4% holding.

In January, a group of creditors representing $800 million worth of bonds formed a consortium to seek alternatives to a bankruptcy filing that may best preserve their claims.

"The Rescap Creditor Group is concerned with media reports that assert that Ally may attempt to abandon Rescap without taking responsibility for Rescap's liabilities," said the creditors in a Jan. 9 statement. "A forced Rescap filing would be a big mistake and create significant litigation against Ally," they added.

Nevertheless, other parts of the unit such as an in-dealership auto insurance business have strong value, according to KBW because of their ties to carmakers, making the businesses worth 1.2 times book value. Those auto insurance units may also find M&A interest as part of a bundled auto finance sale. " Rather than stand-alone operations, these businesses are probably more valuable as part of the broad, holistic package Ally brings to dealerships," writes KBW.

With strategic value to Ally Bank's deposit taking and auto lending businesses and some legal uncertainty removed from its insurance business, the government may now look to exit its $17 billion Ally stake through sales. The U.S. Treasury is the majority shareholder and we do know the Treasury is looking to wind down its TARP program in the near future which could mean recouping investment in Ally through a company sale," writes KBW.

For more on bank M&A, see 5 wasy bank mergers are changing and 5 bank stocks that could jump on 2012 M&A.

-- Written by Antoine Gara in New York

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