Carvana, the online used car marketplace, has agreed to buy Kar Global's Adesa U.S. auction subsidiary for $2.2 billion in cash, an acquisition that will add another revenue stream and a network of physical sites.
The acquisition announcement was made alongside a fourth-quarter earnings report and marks a transition for the pure online business into a more traditional physical car dealer.
Carvana customers can use the company's mobile or web app to shop, buy and finance their vehicle purchase. Those vehicles can either be picked up at one of its 30 multi-story car vending machines or delivered directly to a customer's home. Carvana has 15 inspection and reconditioning centers where vehicles are evaluated before they are sold. Customers can sell their cars to Carvana.
The additional revenue and physical footprint that Adesa U.S. offers appears to be too big of an opportunity for Carvana to ignore. It comes at the right time.
In the fourth quarter, Carvana sold 113,016 vehicles and generated $3.75 billion in revenue, a 57% year-over-year sales growth. There is a gradual decline in growth towards the end of the year. In the third quarter, Carvana sold over 100,000 retail units.
Carvana hasn't reached GAAP profitability. The losses in the fourth quarter were $182 million, which was more than the losses in the same period last year. The total losses for the year narrowed considerably. The company had a net loss of $472 million in the previous year.
Carvana will be able to inspect and recondition the vehicles it sells online at Adesa's 56 physical sites. The company said in its letter to shareholders that it will continue to operate Adesa U.S.'s physical auctions while simultaneously developing the sites to include Carvana's standard retail inspection, reconditioning and logistics capabilities.
Carvana said Adesa U.S. reconditioning operations could help increase production capacity from 2 million units to 3 million units annually.
98% of the US population will be within 100 miles of inspection and reconditioning centers if the network of 56 sites is combined with Carvana's existing infrastructure.
In its shareholder letter, the company said that it sees an opportunity to increase its auction capabilities and deepen its relationships with many large and important players in the automotive industry.
The revenue possibilities are an important factor for a company that saw high used car sales come back down to earth. Adesa U.S.'s business brought in more than one million transactions through those sites, and brought in more than $800 million in revenue.
The risk that Carvana will see its operational expenses grow past its profit potential comes with this potential reward.
Carvana received $3.275 billion in financing from two banks to fund the purchase. The remaining $1 billion will be used for improvements across the 56 Adesa U.S. sites.
Adesa U.S.'s wholesale auction business will continue to operate under its existing brand name. John Hammer, president of Adesa U.S., along with other senior-level executives, will move over to Carvana once the deal closes.
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