After riding the tidal wave of demand for used cars during the pandemic, e-retailer Carvana has announced its plan to acquire ADESAs’ U.S. physical auction business from KAR Global for $2.2 billion cash. The deal comes as Carvana’s stock has dropped as much as 90% off its 52-week high. While the company had been flying high, it has fallen drastically and hopes to use this move toward bricks and mortar to reverse its precipitous decline.
Carvana stated in the company’s press release that “Despite the recent industry slowdown, Carvana continues to grow and deliver exceptional experiences to an increasing number of customers.” By acquiring ADESA’s 56 locations in the U.S., totaling approximately 6.5 million square feet of buildings, the company hopes “to use this ADESA U.S. alignment to both improve the experiences of the ADESA U.S. physical auction customers and to focus on significant and sustainable efficiencies, and unit economic improvements, for Carvana to catapult back into rapid profitable growth as the industry inevitably rebounds.”
Since the pandemic, the average used car price has skyrocketed 42%. These prices are a significant factor in driving the highest inflation figures that the nation has suffered in decades. Jeremy Powell, chairman of the Federal Reserve explained, “A pretty substantial part, or perhaps all of the overshoot in inflation comes from categories that are directly affected by the re-opening of the economy, such as used cars and trucks.”
Source: https://www.npr.org/2022/02/08/1078333943/buying-a-car-chips-supply-chains
The automotive industry was initially hit hard from the lockdowns and economic uncertainty drove consumers to shy from large purchases. But as the economy reopened, the pent-up demand sent consumers shopping, with cars viewed as a way to avoid the potential virus transmission of public transport. Flush with cash from government aid and expanded benefits, consumers’ household income actually increased during 2020. Many used their new savings as the dealership or – often with Carvana’s help – shopping online.
But as the consumers returned, the automakers have continued to suffer from supply chain shocks. Factories worldwide shut their doors during the early months of the pandemic, only to reopen to shortages in key components, like semiconductors. Many automakers focused these scare materials on building luxury cars with the highest margins. With so few affordable and mid-range vehicles available, consumers flocked to used cars.
Carvana flourished. While it has yet to turn a profit during its ten years in operation, the company’s revenue increased along with the prices for used cars, propelling Carvana to become the top performing auto retail stock of 2020. But as the stock market has declined along with confidence in the economy, investors have punished Carvana’s shares.
According to Matterhorn’s M&A database, which harnesses both AI and attorneys to digest the granular deal points of publicly announced transactions, Carvana was advised by law firms Kirkland & Ellis LLP, and financial advisor Citi and J.P. Morgan Securities LLC. KAR Global, which sold ADESA’s U.S. physical auction business to Carvana was advised by law firm Skadden, Arps, Slate, Meagher & Flom LLP, and financial advisor Goldman Sachs & Co. LLC.