KAR focus on online car auctions after sale of ADESA U.S.

KAR Global plans to go all-in on morphing into a nimbler, online-focused wholesale company once it turns the keys to its U.S. physical auction unit over to Carvana Co.

In making that deal to sell its ADESA U.S. operations to Carvana, KAR Global CEO Peter Kelly aims to trade off that in-person business — 56 sites across the nation where dealers can go for an auction — for an infusion of $2.2 billion and the chance to amplify its online auction offerings.

It means KAR will put a spotlight on its platforms such as Carwave, the online business acquired last year that dealers can use to see daily live auctions of trade-in vehicles.

Customers ultimately see a future with "more digital transactions, not fewer," Kelly said last week after KAR reported a net loss for the first quarter.

KAR intends to capture more of the market for dealer-to-dealer transactions, and Kelly has said platforms such as Carwave and its BacklotCars unit might expand that peer-to-peer segment from an estimated 5 million vehicles in 2019 to 15 million in the future. Such expansion would give Kelly's strategy plenty of room to play out.

KAR's integration of Carwave is on track, Kelly said last week. The first wave involved deploying a new vehicle-inspection format in the first quarter for both Carwave and BacklotCars, KAR's online dealer-to-dealer site that operates a so-called bid-ask marketplace around the clock.

Kelly also has given notice that there's a chance some of KAR's remaining brands will be consolidated during a second wave of integration. For instance, Carwave might live on as a format within the BacklotCars business, he said.

"We're dealing with network effect both on the seller and buyer side of those marketplaces, so fragmenting that marketplace doesn't make sense," Kelly said.

BacklotCars, Carwave and TradeRev, KAR's mobile app that mimics physical auctions, sold about 550,000 vehicles in North America in 2021, up 38 percent from 2020. In the first quarter of 2022, the three units sold 133,000 vehicles, up 6.4 percent from the year-earlier period.

Another of KAR's crucial online businesses, Openlane, an online platform through which automakers and finance companies wholesale off-lease vehicles, performed worse than in previous years because off-lease supply is down about 60 percent. CarsArrive and AutoVIN — KAR's other businesses that handle off-lease vehicles — also took a hit.

"The reality that [customers are] experiencing today in terms of their off-lease portfolio is markedly different to what it was two and a half years ago," Kelly said.

Still, Openlane is a crucial asset because it is key to some of KAR's largest customer relationships, said Kelly, who co-founded Openlane and sold it to KAR in 2011.

Per-vehicle auction fees rose 29 percent to $65 in the quarter because of higher vehicle values and fewer low-fee commercial vehicles moving through KAR's digital businesses.

KAR's performance in the first quarter didn't meet expectations set by J.P. Morgan analysts, but they said last week that the company's long-term outlook may be more positive than some investors might think.

Selling off the physical ADESA U.S. business should allow more focus on Openlane and the company's other online businesses, J.P. Morgan analyst Ryan Brinkman wrote in a research note. KAR could see growth as it rolls out its plan to nab a larger part of the market through those online offerings, he added.

The sale of ADESA U.S. and the resulting shift toward becoming a fully digital business will help KAR cut costs, company executives said. KAR is expecting cost reductions by year end to be at an annualized rate of at least $30 million.

Kelly acknowledged KAR's client base has needed "time to digest" the agreement to sell ADESA U.S. to Carvana, the No. 2 used-vehicle retailer in the nation by sales volume. After the deal was announced, some customers were confused over its terms, he said.

In fact, some automakers and dealers have indicated they will move away from using ADESA U.S. now that it's set to be held by Carvana, a formidable competitor.

Kelly didn't elaborate on whether KAR saw users shift away specifically because of the transaction, expected to be finalized this week.

But he said KAR customers are fully aware the company has its sights on a larger-scale digital transformation. No additional education or effort will be needed to make them understand what KAR will be like without ADESA U.S., he said.

Customers "understand the rationale, and I think they're enthusiastic about working with the new KAR," Kelly said.