Another Car Disrupter Is Coming to Market. Here’s What Investors Need to Know.

October 23rd, 2020 by

©2018 Cindy Kelleher

Article by Barron’s

Used-car dealership disrupter CarLotz is set to go public by merging with a special purpose acquisition company, or SPACAcamar Partners Acquisition.

CarLotz is growing fast and, if its growth goals are hit, it will be mentioned by investors in the same breath as larger peers Carvana (ticker: CVNA) and Vroom (VRM). CarLotz will trade under the ticker LOTZ once the deal closes later this year, replacing Acamar’s (ACAM) listing.

CarLotz sells used cars, SUVs, vans, and trucks on consignment. In a nutshell, the start-up seeks to arbitrage the difference between wholesale and retail used-car prices. That spread is significant—potentially several thousand dollars per vehicle.

Any car owner knows they can get more selling their used car privately than they can from trading it in. And any car buyer knows they will pay more for a used car on a lot than from a private seller. Selling privately, however, is a hassle that requires placing ads and taking calls from strangers. Buying privately, similarly, is less convenient and riskier given that professionals haven’t checked the car for defects.

Enter CarLotz. They take and remarket used cars for a fee, using both physical and digital avenues to reach buyers and sellers—“omnichannel,” to use a buzzword. CarLotz’s so-called hubs have the assets and technology to offer certain traditional dealership services, such as financing and valuations. And they split the wholesale-retail used-car spread with customers.

“Our [strategy] allows us to offer [vehicles] at a lower price,” CarLotz CEO Michael Bor tells Barron’s.

He says his company is similar to other online dealers like Carvana or Vroom in some respects. They all try to create a better car-buying experience. But Bor also sees a big difference in how CarLotz sources its inventory.

The company offers used-car sellers a better deal. Fleet-management companies, such as ARI, do better than they would at a wholesale auction. And private car sellers do better than trading it in. “I think we will significantly disrupt the wholesale side of the market,” Bor says.

That could be not-so-great news for existing wholesale players such as KAR Auction Services(KAR). But the automotive market is huge. Roughly 40 million used cars trade hands each year in the U.S. New-car sales—in a nonpandemic year—total roughly 17 million units. The U.S. car industry, overall, is a trillion-dollar business.

The U.S. auto market is also very fragmented. One of the largest U.S. dealership groups, Penske Automotive(PAG), sells roughly 500,000 cars a year. That’s a lot, but still less than 1% of the total market.

Acamar stock was essentially flat after the deal was announced on Thursday, rising two cents on Friday, to $10.19. Acamar’s $311 million trust and a $125 million private investment in public equity, or PIPE—from investors including Fidelity, former General Motors CEO Rick Wagoner, and KAR—will provide $436 million in proceeds to CarLotz. After expenses and cashing out some existing shareholders, the company will have about $321 million in new cash on its balance sheet.

The plan is to invest that in technology, marketing, and expanding CarLotz’s physical footprint to address a greater portion of the U.S. used-car market. It currently has eight hubs in five states.

“We’ve been constrained by capital and geography,” says Bor. “When there is a CarLotz within 100 miles of people, they can bring their vehicles to us…. [Our current locations] are full, we need more space. And this transaction gives us the ability to go out and build that.”

The deal values CarLotz at about $850 million, or roughly eight times estimated 2020 sales. But with expected rapid growth, it’s more helpful to compare online auto disrupters based on 2023 sales. CarLotz’s forecast is for between $1.5 billion and $1.7 billion in revenue that year, and $70 million to $110 million in earnings before interest, taxes, depreciation, and amortization.

Carvana is the most valuable online seller, with a market capitalization of about $34 billion. It’s valued at more than two times estimated 2023 sales. CarLotz’s valuation, by comparison, is about one-quarter of the Carvana multiple.

High valuation hasn’t stopped Carvana stock. It’s had quite a year. Shares are up about 120% year to date, far better than the comparable returns of the S&P 500 and Dow Jones Industrial AverageVroom priced its initial public offering at $22 a share in early June. Shares are up about 100% since then.

Shift Technologies(SFT), another online car seller, recently completed its own SPAC merger. Shares are still trading just below the $10 level, which is where the SPAC that merged with Shift issued capital.

One reason for the weaker performance from Shift, and now Acamar, is there are far more SPACs around these days. Some 160 of them have gone public in 2020, raising almost $60 billion. That’s more capital in SPACs than the entire previous decade combined. More money chasing deals could be spooking investors—for now.

 

Written by Al Root & Nicholas Jasinski

 


 

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