Online used-vehicle retailer Carvana, pressed in recent months to expand its vehicle reconditioning capacity, said Thursday it plans to buy the ADESA U.S. physical wholesale auction business from KAR Global Inc. for $2.2 billion in cash.
The transaction would give Carvana exclusive use of the ADESA.com marketplace in the U.S., plus all auction sales, operations and employees at ADESA’s 56 vehicle logistics centers in the country. It also would help expand the online retailer’s customer reach and increase its production capacity by an estimated 2 million vehicles per year, Carvana CEO Ernie Garcia said.
The deal, which is expected to close sometime in the second quarter of 2022, “substantially improves” the span of Carvana’s logistics network, Garcia said late Thursday on a conference call after the retailer announced a $182 million net loss for the fourth quarter even as quarterly and annual revenue soared.
“We will move from currently having inspection centers within 200 miles of 56 percent of the U.S. population to eventually being within 200 miles of 94 percent of the U.S. population,” Garcia said. “Demonstrating the quality of these locations, we will move from being within 50 miles of 16 percent of the U.S. population to being within 50 miles of 58 percent of the population.”
That will slash shipping times to Carvana customers, Garcia said.
Carvana opened its 15th inspection and reconditioning center at the beginning of 2022, which brought its total production capacity to 880,000 vehicles, Garcia said. Production for the retailer means getting used cars and trucks sale-ready: receiving, inspecting and reconditioning them.
The company plans to open six additional centers by the end of the year. Five will open as originally scheduled but the timetable for the opening of the sixth could change because of the ADESA transaction, Garcia said.
Carvana said it will keep the ADESA brand name for the wholesale auction business. Garcia praised ADESA — a longtime giant in the wholesale vehicle auction business.
“ADESA earned its place as a respected brand in our industry because of its dedicated team and robust operations,” he said in a news release. “We have long admired ADESA, having come to appreciate their approach as a customer for many years. We look forward to joining forces and continuing on the path of delivering the best customer offering for both retail and wholesale customers.”
KAR Global shares skyrocketed on the news, rising 69.5 percent to $23.20 in after hours trading.
Carvana shares fell 4 percent to $120.99 in late trading.
KAR Global plans to use the proceeds from the deal to pay down its debt. The company said the transaction will allow it to focus on its other digital marketplaces, and it should also reduce KAR’s 2022 adjusted earnings before interest, taxes, depreciation and amortization by about $100 million on an annual basis.
“This transaction will enable a leaner, more nimble operating model and faster long-term growth rate at KAR,” KAR Global CEO Peter Kelly said in a news release.
About 4,500 current ADESA and KAR employees will transfer to Carvana when the deal closes. That includes all field personnel that work at the ADESA U.S. vehicle logistics centers, plus corporate employees and executives who handle the ADESA U.S. physical auction business. ADESA U.S. President John Hammer also will transition to Carvana once the deal closes.
In a note published Thursday, analysts from Stephens Inc. predicted the deal will be well-received for KAR Global, though it’s a little surprising given how much emphasis KAR has placed on the value of having both physical and digital offerings.
Stephens analysts Daniel Imbro and Rick Nelson also wrote that they expect the deal to be received negatively for Carvana, even if it does provide the retailer with increased reconditioning capacity.
KAR Global is scheduled to hold its own conference call about the transaction Friday morning.
Financial details
Carvana said it has obtained committed financing of up to about $3.3 billion from JPMorgan Chase Bank N.A. and Citi. The money will be used to pay the $2.2 billion purchase price. It will also fund “an additional $1 billion in improvements” planned across the 56 ADESA U.S. sites, according to Carvana.
Citi and J.P. Morgan Securities LLC are financial advisers to Carvana on the deal. Kirkland & Ellis LLP is Carvana’s legal counsel on the deal.
Goldman Sachs & Co. LLC is financially advising KAR Global. Skadden, Arps, Slate, Meagher & Flom LLP is KAR Global’s legal counsel.
After the deal was announced, Carvana announced these financial results for the fourth quarter and full-year 2021:
Q4 net revenue: $3.75 billion, just more than double from a year earlier
Q4 net loss: $182 million, wider than Carvana’s $154 million loss a year earlier
Q4 retail vehicles sold: 113,016, up 57 percent from a year earlier
Q4 total gross profit per vehicle: $4,566, up 35 percent from a year earlier
2021 net revenue: $12.81 billion, more than double 2020’s $5.59 billion
2021 net loss: $287 million, narrower than Carvana’s $462 million loss in 2020
2021 retail vehicles sold: 425,237, up 74 percent from 2020
2021 total gross profit per vehicle: $4,537, up 40 percent from 2020