KAR to Buy CARWAVE for $450M

KAR Auction Services, Inc. (KAR), a provider of wholesale used car auction services and salvage auction services, inked a $450 million deal to buy CARWAVE Holdings LLC. CARWAVE is an online dealer-to-dealer used car trading platform featuring certified mechanical inspections and buyer guarantees. Shares popped 3.4% on the news, closing at $17.37 on August 23.

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The CARWAVE acquisition is expected to strengthen KAR’s position in the dealer-to-dealer segment for the wholesale used vehicle market, along with accelerating its digital marketplace transformation.

With a broad network of franchise and independent dealers in California, the largest wholesale automotive market, and a growing presence in Texas and Arizona, the CARWAVE acquisition will boost KAR’s growth plans and allow both companies’ customers access to a larger buyer and seller base, the company said.

Markedly, KAR’s North American dealer-to-dealer platforms are expected to immediately become profitable after the acquisition. The deal is expected to close before the current year-end, subject to certain closing conditions. (See KAR Auction Services stock charts on TipRanks)

Peter Kelly, CEO of KAR, said, “This acquisition will advance our clear growth strategy in the dealer-to-dealer segment and accelerate the positive momentum we’ve sustained over the past several quarters…CARWAVE’s asset-light, technology-forward business model, with approximately 100,000 vehicles sold over the past 12 months, will enable us to continue driving innovation, achieve immediate profitability across our dealer-to-dealer offerings, and enhance our position in the highly competitive dealer-to-dealer space.”

Following the news, Barrington analyst Gary Prestopino maintained a Buy rating on the stock with a price target of $25, implying 43.9% upside potential to current levels.

Prestopino noted that the CARWAVE acquisition will enhance KAR’s market share in large wholesale markets, especially California and Texas.

The analyst said, “We believe that KAR’s common shares are very undervalued with a sum of the parts valuation ranging from $33-40 per share. We believe consistent growth with at least meeting guidance expectations can drive the stock’s TEV/EBITDA multiple higher over time from its current level of 8.8x and 7.7x our 2021 and 2022 adjusted EBITDA estimates, respectively.”

With 4 unanimous Buys, the stock has a Strong Buy consensus rating. The average KAR Auction Services price target of $24.50 implies 41% upside potential to current levels. Shares have gained 15.6% over the past six months.