I wrote up KAR stock back in 2021 when investors were confusing secular issues (auctions are becoming more competitive with online presence) with cyclical ones (there just were no cars to sell!).

Now, KAR is selling it’s physical auction business to Carvana in a $2.2BN transaction ($1.6BN after–taxes). This is great compared to pre-sale market cap of $1.6BN (+$1.9BN of corp debt).

Interestingly, KAR says it will only lose about $100MM of EBITDA (KAR did $481MM in 2021). So they sold the physical auction business for about 22x.

 So Ryan, I believe, from a revenue standpoint, the revenue impact is approximately, I believe, $800 million in the current year. And Eric may correct me if I’m wrong. And the adjusted EBITDA impact in the current year are approximately $100 million. As I mentioned, that $100 million is a combination of 3 numbers, the EBITDA of the business, which is the significant majority of that number, I would say, by far. And then revenue from the commercial service agreement, which is a modest sum in the current year. And stranded costs, which is an even more modest sum in the current year, but obviously, some benefit, we think, over time there as well.

They’ll get about 50% of their EV by selling 25% of their EBITDA. Not bad!

The company has been trying to shift more online, acquiring several online auctions and attending podcasts and hosting an investor day highlighting their focus shift.

Here’s the thing: The core to my thesis was that I thought physical auctions were necessary AND a competitive advantage.

Reminder: I used to buy and sell used cars. I bought a couple lemons online and personally, I swore it off. There are simply too many moving parts on a car to capture it in a picture, especially  those that are coming from a lease.

When a vehicle comes off-lease, if the leaseholder and dealer do not purchase the vehicle, the captive finance company then owns it and sells it. Because finance companies do not have dealerships, they use the wholesale market to sells the cars back to the dealer network. Typically a vehicle will enter an OPENLANE closed online auction (only open to that OEM’s franchise dealer network), if it doesn’t sell there it will move to an OPENLANE open online auction (open to all of KAR’s registered dealer buyers), and if it doesn’t sell there it will be moved to/ sold at physical auction.

So why am I selling?

This sounds like KAR is keeping the great parts? Doesn’t the KAR stock look cheap now with all that cash?

Maybe, but I don’t want to own this anymore. It is against what I firmly believe the industry requires to move volume efficiently. So, so, so many cars actually end up going into physical auction. And I think having this integration is actually valuable. I don’t have the numbers on me, but the last two years are irrelevant anyway.

Online is less capital intensive (theoretically…), but it isn’t clear to me who the “winner” will be long-term. I worry about that. Clearly KAR has acquired several online platforms that weren’t around just a few years ago.

If OPENLANE wasn’t the obvious winner (i.e. they had to acquire other players to augment it), why would it be in the future?

I somewhat doubt that because of this, KAR stock should trade at a structurally higher multiple. Could be totally wrong.

Oh, and last thing, KAR has a pref that converts at 17.75, so share count is going up 29% (my math it goes from 124 to 159-160, could be wrong though). I knew this going in, but given all the moving parts, I am closing out here.

I have the pro forma KAR stock trading at ~9x PF EBITDA ($3bn market cap, $100MM net debt vs. $345MM of EBITDA). That screens somewhat cheap, but I’m not staying along.