Ally Financial (ALLY) to Acquire CardWorks for $2.65 Billion

Ally Financial Inc. ALLY agreed to acquire CardWorks, Inc. for $2.65 billion. The deal, which is expected to close in the third quarter of 2020, is subject to customary regulatory approvals and closing conditions.

Headquartered in Woodbury, NY; CardWorks is a privately held U.S. credit card issuer. It is focused on the non-prime segment, with a complementary full-spectrum unsecured servicing operation, which includes third-party servicing and recovery capabilities.

Ally Financial’s CEO, Jeffrey J. Brown, said, “CardWorks represents an industry-leading credit card platform in the U.S., and this acquisition serves as an important milestone in Ally's evolution to be a full-service financial provider for our customers. Beyond the compelling strategic rationale and financial enhancements this transaction brings, CardWorks is an ideal cultural fit for Ally.”

Terms of the Deal

Ally Financial is expected to fund the transaction with $1.35 billion in cash and $1.30 billion in its common stock. Notably, the final consideration is subject to closing equity, and other adjustments and fill-or-kill rights.

Per the deal, CardWorks’ subsidiary, Merrick Bank, will merge with Ally Bank.

The chairman, CEO and founder of CardWorks, Don M. Berman, currently owns 70% of the company. Per the agreement, he will receive a combination of cash and Ally Financial’s shares as his consideration.

However, shares of Ally Financial’s common stock, which Mr. Berman will be granted, will be subject to a lock-up agreement, which will restrict the sale or transfer of 100% of his shares until the one-year anniversary of the closing date. At this point, he will be allowed to sell or transfer upto one-third of his shares.

Subsequent to which, on each anniversary, Mr. Berman will have the right to sell or transfer upto another one-third of his shares. Thus, three years after the completion of the transaction, he will be permitted to sell or transfer remaining shares of Ally Financial’s common stock.

Financial Impact & Benefits

Ally Financial’s Core return on tangible common equity (ROTCE) is expected to improve by 100-150 basis points (bps) in 2021 and 2022. Moreover, the transaction will likely provide up to 100 bps of adjusted EPS accretion for the company over the same period.

Further, Ally Financial’s common equity tier 1 (CET1) capital ratio is expected to remain largely unchanged pro forma for the acquisition. The company expects to maintain a 9% CET1 target. Notably, Ally Financial has planned to repurchase shares worth upto $1 billion, which is part of its previously announced $1.25-billion share repurchase program.

The deal complements Ally Financial’s market-leading auto finance, insurance and commercial product lines. The acquisition of CardWorks is expected to enhance Ally Financial's award-winning direct bank deposit and consumer product platform.

Moreover, post the acquisition, Ally Financial will be able to better achieve its long-term objectives, which include offering differentiated consumer products supported by a growing and low-cost deposit base.

Berman stated, “In leveraging Ally's commitment to innovation and adaptiveness, the combined company will be well positioned to meet the financial needs of our ever-growing customer base and deliver sustainable growth and performance.”

Our Take

Ally Financial’s opportunistic buyouts along with its efforts to diversify revenues will likely continue to support profitability. Moreover, given the rise in consumer loan demand, the company’s top line is expected to improve further in the near term.

Shares of Ally Financial have gained 17.9% over the past year compared with 13.5% growth recorded by the industry.

Currently, the company carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

A few other top-ranked stocks from the finance space are Cohen & Steers Inc. CNS, Legg Mason, Inc. LM and Artisan Partners Asset Management Inc. APAM. Each of these stocks currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cohen & Steers’ Zacks Consensus Estimate for current-year earnings has been revised upward by 7.6% over the past 60 days. Moreover, the stock has rallied 14.5% in the past three months.

Legg Mason has witnessed an upward earnings estimate revision of 3% for the current fiscal year over the past 60 days. The company’s shares have gained 31.8% in the past three months.

The consensus estimate for earnings of Artisan Partners has been revised 6.7% upward for the current year over the past 60 days. The stock has gained 22.8% over the past three months.

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