Baby You Can Spin From KAR- Spin Off Of IAA Salvage Auction Business Expected Within Year

It’s a part of the economy that is not visible to many consumers, but if you have ever bought a used car, there is a good chance it passed through KAR Auction Services(KAR) at some point. Last year, the company sold approximately 5.6 million vehicles at auction.

KAR consists of two distinct auction businesses. Adesa, its wholecar auction business, sells dealer and institutional(off-lease, repossessions) vehicles. Last year, it was #2 in the North American market, selling 3.2 million vehicles at 75 locations. 45% of sales took place online.  Adesa accounted for $1.938 billion in revenue(56% of KAR revenue) and $473 million in adjusted EBITDA(49% of KAR adjusted EBITDA).

Insurance Auto Auctions, IAA, its salvage car auction business is the co-leader in the North American market with 2.4 million vehicles sold at over 170 locations. 60% of sales took place online. IAA accounted for 35% of KAR’s revenue and adjusted EBITDA- $1.219 billion and $340 million, respectively. Copart(CPRT) is the biggest competitor of this business.

KAR also owns AFC, the #2  North American independent dealer vehicle inventory finance company. At $301 million, AFC was just 9% of KAR’s revenue, but accounted for 16% of adjusted EBITDA($154 million).

On February 27, the company announced plans to spin off IAA as an independent, publicly traded company.

The separation aims to increase shareholder value and focus each company’s strategic priorities on its respective marketplace and unique customers. The tax-free spin-off is expected to close within the next twelve months and will create two independent, publicly traded companies with distinct strengths that position them for continued success and market leadership.

“IAA has been a meaningful part of the KAR platform for over ten years, despite limited operational overlap between IAA and KAR’s core whole car operations,” said Jim Hallett, Chairman and CEO of KAR Auction Services, Inc. “The proposed separation will give KAR and IAA the flexibility to advance unique strategic priorities and make independent decisions on investments, acquisitions and capital expenditures. In turn, this will help both companies focus investments and innovation on serving their customers and strengthen their respective competitive positioning in the global marketplace.”

The decision to pursue a separation of IAA from KAR was approved by the KAR Board of Directors after considering multiple independent analyses of potential growth and shareholder value generation opportunities. KAR believes the proposed transaction will unlock shareholder value not currently reflected in the combined company by simplifying the business model and financial reporting of the independent companies. The transaction will provide investors with enhanced insight into each company’s unique value drivers, allowing them to better assess KAR and IAA on the merits of their individual performance and value each company separately.

“Our primary responsibilities are to deliver on our customer commitments and maximize value for our stockholders,” said Hallett. “The two companies will offer distinct and compelling investment opportunities based on track records of successful performance and highly streamlined operating models.”

After completion, KAR will focus primarily on its whole car auction marketplaces and technology solutions serving OEMs, captive financing companies, vehicle lending institutions, fleets, and franchise and independent car dealers. IAA will focus on the salvage vehicle marketplace serving insurance carrier sellers and a network of buyers including dealers, vehicle and parts recyclers and metal scrapping companies. Jim Hallett will remain CEO and chairman of the Board of Directors for KAR. John Kett, who currently serves as IAA’s president and CEO, will continue to lead IAA after the separation.

“The support of KAR has allowed IAA to significantly grow our business and deliver an unmatched portfolio of products and services to our insurance customers,” said John Kett, president and CEO of IAA. “With this strong foundation and our robust pipeline of innovation, IAA is well positioned to serve our customers and expand our market presence after separation.”

Following the separation, Insurance Auto Auctions, Inc. will retain their North American salvage vehicle operations and the HBC Vehicle Services business in the UK. All other current KAR businesses will remain part of KAR Auction Services, Inc.

The companies are committed to ensuring a smooth and seamless transition of all operations for their respective customers, employees, suppliers and business partners. The companies will begin the process of defining the organizational designs of the resulting entities to ensure the right capabilities are in place to drive long-term growth and shareholder value. Comprehensive transition plans will be developed and multiple cross-company work teams will work collaboratively to complete the proposed transaction as efficiently and effectively as possible.

This looks like a fairly straightforward spinoff. With scrap prices remaining low and used car inventory increasing as a result of record vehicle production in recent years, each of these businesses will be changing in the next few years. Movement towards electric and autonomous vehicles and substitution of ride sharing services for vehicle ownership may introduce new challenges as well. For the time being, you have two businesses, each with strong revenue and profitability that may thrive under independent leadership.

Disclosure: The author holds no position in any stock mentioned


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