NEW YORK -- Activist investor Starboard Value has built a new position in KAR Auction Services Inc. and believes there are tremendous opportunities in spinning off its salvage unit and improving the performance for its remaining businesses.
Insurance Auto Auctions -- the salvage unit that KAR said it would spin off in February -- is a great business with strong growth potential, Starboard CEO Jeff Smith said at a conference Tuesday in New York. The rest of KAR has the ability to improve margins and return value to shareholders, he said.
“We think the spin will be completed in the next few months,” Smith said at 13D Monitor’s Active-Passive Investor Summit. “We believe both businesses will benefit from the focus of being a standalone entity and we think the valuation is incredibly compelling.”
Smith didn’t disclose the size of his hedge fund’s stake in KAR, which auctions used and salvaged vehicles. Starboard bought into KAR amid a decline in its share price due to investor confusion over the timing and certainty of the spinoff.
KAR fell 13 percent on Feb. 20 after its CEO struck a cautious tone on the status of the spinoff while discussing earnings. On Feb. 27, the company announced that it expected to close the spinoff within the next 12 months.
KAR shares rose 1.4 percent to close at $56.21 on Wall Street on Wednesday, giving the company a market value of more than $7.3 billion.
Smith pointed to salvage specialist Copart Inc. as an example of what KAR’s salvage business could achieve on its own, noting that KAR trades at a value equivalent to 10 times earnings before interest, taxes, depreciation and amortization, a measure known as Ebitda.
Copart, in turn, trades at about 18 times Ebitda. That suggests that the full value of KAR’s salvage unit isn’t being realized, some investors will contend.
“We were honestly surprised when analyzing KAR with where it was trading with two market-leading businesses,” Smith said. “We think there are multiple ways to create value here.”