John Healy, a research analyst at Northcoast Research Partners, has covered the vehicle remarketing industry for years. Yet like almost everyone in the automotive remarketing industry, he was blindsided by the Feb. 24 news of KAR Global selling its ADESA auction unit to Carvana.
“Our reaction to the announcement is simply ‘Wow,’ as we were not expecting such a move,” he wrote in an investor’s note. Northcoast is an institutional equity research firm that specializes in the remarketing and car rental industries, among many others.
Healy wrote that his industry contacts expressed genuine shock as well, as industry consensus was that ADESA, the second largest wholesale vehicle auction in the U.S., has transferred ownership hands but it was not seen as likely to be bought by a dealer chain. Healy also pointed out that KAR’s stance has been that the combined force of digital and physical auctions was seen a sound hybrid strategy.
That said, the deal makes sense for both parties in both economics and operations.
The transaction leaves KAR with virtually no debt, earnings of more than $250 million, and 1.6 million cars selling on its digital platforms. Adjusted earnings will be reduced by about $100 million, but KAR sheds about 50% of its headcount, which will help it reap better earnings and higher growth on its remaining (digital) platforms.
On the other side, ADESA’s reconditioning business and ability to marshall vehicles will fit nicely with Carvana’s needs. The deal will also give Carvana access to more cars and more dealer relationships, which should help Carvana expand its online sales universe to new third parties, Healy wrote.
But the deal does leave a few questions, as Carvana is a traditional competitor to the dealers running vehicles through ADESA’s auctions. Does this push them to alternatives such as Manheim, the largest U.S. auction player, Copart, ACV’s online auctions, and independent auction house chains?
A few more questions: Does the deal force CarMax and its brick-and-mortar model to evolve by integrating more non-traditional auto retail assets in their operations? OEMs remarket thousands of repurchase cars from rental companies through auctions. Will this deal benefit KAR’s online auction portal Openlane? Will Copart or IAA have an opening to capture more repo business, a traditional sweet spot for KAR?
The questions will take time to answer. But for Healy, this deal may only be the beginning: “We see this transaction as likely creating a domino effect in the industry of potential new partnerships and previous partnerships being reexamined, and such outcomes to us are far from known at this time,” he wrote.
