Auto lender Ally Financial Inc. (ALLY) and Cardholder Management Services, Inc. (CardWorks) announced that they have mutually agreed to pull out of their planned merger agreement due to volatile financial market conditions caused by the coronavirus pandemic.
Shares in Ally Financial jumped 9% to $20 in pre-market trading on Thursday. The companies said in a joint statement that their board of directors approved the termination after carefully considering the impacts of COVID-19 on global markets and the economy.
Neither party will incur any termination or break-up fees as a result of the mutual decision, they said.
“Given the unprecedented economic and market conditions resulting from the COVID-19 global pandemic, I believe it is in the best interests of our customers and stakeholders to terminate the agreement,” said Ally CEO Jeffrey J. Brown. “This was a difficult decision to make following a long process to bring two strong companies together.”
Under the terms of the initial agreement announced in February, Ally Financial offered to buy credit card and consumer finance lender CardWorks in a deal valued at about $2.65 billion. The transaction would have included about $1.35 billion of cash and $1.30 billion in Ally common stock.
Piper Sandler analyst Kevin Barker said the termination of the CardWorks merger is “clearly a positive development” given the dilution to tangible book value combined with a very long earn-back period for a company with heavy exposure to subprime consumer credit.
Sandler raised Ally’s price target to $27 from $25 and reiterated a Buy rating, saying that he expects a “strong positive stock reaction” with Ally no longer committed to a “heavily-dilutive transaction”.
Since the initial announcement of the merger agreement in mid-February, Ally shares have plunged some 44%. Looking ahead, analysts are optimistic about the stock’s prospect putting the average price target at $25.23, which implies 38% upside potential over the coming year.
Overall though, the Street is cautiously optimistic about the company’s rating outlook. The Moderate Buy consensus shows 10 Buys versus 3 Holds and 1 Sell. (See Ally stock analysis on TipRanks).
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