KAR Auction Services (NYSE:KAR) is undervalued on a sum-of-the-parts basis, which will be unlocked
following a spinoff of its two auctions businesses that’s scheduled to be completed by Q1 2019. In this
write-up, we will discuss why both of its businesses are currently underappreciated by the public
markets and address the public misperceptions of the whole car auctions business. Our $83 PT implies a
KAR Auction Services is the holding company for ADESA whole car auctions, IAA salvage vehicle auctions,
and a supporting floorplan financing arm called AFC.
ADESA hosts whole car auction marketplaces at 75 locations globally and transacts 3.2 million vehicles a
year. ADESA sources off-lease and repossession inventory from auto OEMs, as well as from dealers and
commercial fleet operators like Hertz and Avis. Last year, ADESA acquired TradeRev to access the 10
million units/year dealer-to-dealer market. ADESA is the #2 whole car auction at 28% market share
behind closely held Cox Automotive’s Mannheim. ADESA IS ~55% of KAR revenue and 50% of EBITDA.
IAA is the co-leader in North American salvage vehicles auctions and transacts 2.4 million vehicles a year
at 175 locations. 60% of volumes are transacted online. 80% of IAA’s inventory is sourced from auto
insurers following accidents or natural disasters while the rest is from charities, dealers, leasing cos and
rental companies. Unlike the whole car auctions business, which sells to franchised and independent
dealers, IAA’s core customers are licensed dismantlers, rebuilders, recyclers, exporters and qualified
public buyers. IAA dominates the North American market along with Copart at 40% market share apiece,
and is the largest provider of salvage auction services in Canada. IAA is 35% of revenue and EBITDA.
AFC is a captive floorplan financing business that lends to auto dealers and repackages majority of the
finance receivables without recourse at a wholly-owned bankruptcy remote special purpose entity,
which in turn sells to banks in the U.S. and securitizes for broad syndication in Canada. AFC is an atypical
financing business as it earns a significant portion of revenue from fees and warranties and its loans are
short-term dated at 65 days on average, which leads to significantly lower delinquency rates than
traditional auto financing. AFC has 12,400 active dealer customers who each have $250k line of credit on
average with no dealer representing greater than 1.6% of the portfolio. The primary competitor is Cox’s
NextGear Capital. AFC is 10% of revenue and 15% of EBITDA.
On February 27, 2018, KAR announced that it would be separating IAA from the ADESA and AFC
remainco in a tax-free spinoff. The form 10 was filed in late June and the spinoff is expected to be
consummated in Q1 2019.
KAR management has guided to minimal dis-synergies from the spinoff. On the top line, KAR does very
little cross-selling as whole car auctions and salvage auctions sell to different customers. ADESA and
IAA’s technology and accounting are already on separate systems, while shared services tend to be in