Pending ADESA U.S. auction sale to Carvana raises concerns

KAR Global Inc. will focus on honing and growing its slate of digital assets as it prepares to sell its massive ADESA U.S. auto auction business to online used-vehicle retailer Carvana — a move that some wary dealers are watching closely.

The sale came out of KAR Global’s recognition that its digital dealer-to-dealer tools were picking up traction with customers, CEO Peter Kelly said. It’s part of an ongoing digital shift for the company.

“These are our customers’ preferences, not necessarily changes we’re driving,” Kelly told Automotive News last week.

Kelly said that 92 percent of the vehicles KAR Global sold in 2021 were sold to online buyers, up from less than 50 percent five years ago.

While KAR Global had been moving in a more digital direction before the coronavirus pandemic, with executives citing safety concerns about cars and trucks running through auction lanes, it should be noted that the pandemic accelerated that shift. KAR Global went to all-digital auction operations in March 2020, citing then-rising case numbers, and business stayed all-digital until ADESA slowly restarted physical sales last August.

While KAR Global is divesting its ADESA U.S. physical business, Kelly made clear that the wholesale services provider is not merging with Carvana. KAR Global and Carvana will continue to operate completely separately after the $2.2 billion deal closes sometime in the second quarter.

For KAR, the deal simplifies its business, allowing it to focus on its digital offerings such as Openlane, BacklotCars, TradeRev and Carwave, among others, Kelly said. Such concentration aligns with KAR Global’s commitment to a digital future, he said.

“Obviously, there were financial rationales of paying down debt and having more capital available for investments,” Kelly said. “That was an important piece, as well. But, fundamentally, the decision was motivated by, where do we see this industry headed?”

In a Feb. 28 note to clients, Truist Securities analysts Stephanie Moore and Joseph Hafling called the deal “highly attractive” because it will allow KAR Global to pull money from its well-established real estate presence in the U.S.

Kelly said KAR Global will continue to evaluate digital tools for vehicle inspections and logistics solutions that speed up vehicle delivery, two areas in which customers are highly interested. No deals are in the works at the moment, he said.

“There’s no transaction contemplated, there’s nothing to report, but I just think, as we look to a digital future, those areas of inspection and logistics are really important to our customers, so we want to continue to invest there,” he said.

Carvana has been a KAR Global customer for several years — one of the larger buyers at ADESA’s auctions, Kelly said. As part of the deal, KAR Global will act as a technology partner to Carvana, mainly by supporting the ADESA.com digital marketplace and the Simulcast technology that powers ADESA’s in-lane virtual sales.

Once the sale is final, Carvana will take control of ADESA’s 56 U.S. locations, brand name, the ADESA.com U.S. marketplace and 4,500 employees.

Carvana leaders have said the company plans to mainly use the ADESA locations to boost its reconditioning capacity and increase the number of cars and trucks it can get sale-ready each year. KAR Global will keep its ADESA businesses in Canada, the U.K. and Europe.

While time will tell, there’s a chance that some dealers who are skittish about Carvana’s ownership will move away from ADESA when the transaction is complete.

Some analysts suggested after the deal was announced that Carvana-averse dealers — who may view the online retail giant as competition or a threat — will switch their business to other auction companies such as Manheim, the Cox Automotive unit with the largest auction network in North America.

Nick Underwood, general manager of Lutesville Ford in Marble Hill, Mo., told Automotive News that he previously used both ADESA and Manheim to source and divest used vehicles.

In the last two years, the used-vehicle inventory crunch has led him to start sourcing more vehicles via trade-ins and purchases from customers. It’s usually easier to find out the history of a trade-in than a vehicle bought at auction, he said.

Underwood acknowledged that some dealers are wary of Carvana because the company has disrupted the industry in a short period of time.

“I know a lot of dealers don’t really care for Carvana because they don’t portray dealers as being a good, wholesome place to buy a car,” Underwood said. “It’s a more ‘us versus them’ kind of mentality, so I could see some dealers being affected by that and at least being suspicious of the scenario.”

Other dealers view Carvana as a rival because of its large used-vehicle market presence.

It’s a “fierce competitor” to many dealerships, said Allen Turner, president of his namesake auto group, which has two franchised dealerships and a used-only store in Florida and one franchised dealership in Alabama.

Carvana has thrived during the pandemic because consumers, seeking online options, bought more vehicles from the retailer, and that strengthened its hold on the market, said Turner, who shared mixed thoughts about Carvana purchasing ADESA U.S.

“We don’t do nearly as much business with ADESA as we used to — they don’t own auctions that are near our facilities — but it would certainly give me pause to think about, ‘What am I doing there?’ ” he said. “I’m helping support one of our competitors if I continue to do business with those auctions.”

ADESA has been a trusted place to buy and sell cars, Turner said. But he doesn’t know whether dealers will warm up to supporting a competitor such as Carvana.

“I don’t know how dealers, as a whole, are going to react,” Turner said. “The older I get, the more I believe you never say never. I wouldn’t want to draw a line in the sand and say, ‘I’m never going to do business with ADESA,’ but I’m sure going to look for other options, more so than that.”