An IPO Coming Tied To Autos, Really… (GS, CPRT)

KAR Holdings, Inc. is going to sound like a bit of a strange initial public offering if you have gotten used to the dismal US auto industry.  The company has filed for an IPO of up to $400,000,000.00 and will trade on the New York Stock Exchange under a ticker to be determined later.  The sole underwriter listed here is Goldman, Sachs & Co., which parent Goldman Sachs Group Inc. (NYSE: GS) owns/controls a 25.3% stake if you count it under the GS Capital Partners VI Fund with related funds.   This company is now the second-largest U.S. auto auction services provider behind Copart Inc. (NASDAQ: CPRT).

KAR Holdings is a holding company that was organized for the purpose of consummating a merger with ADESA and a combination of IAAI with ADESA. The Company had no operations prior to the transactions on April 20, 2007.   IAAI, a leading provider of automotive salvage auction and claims processing services in the United States, was contributed by affiliates of Kelso & Company and Parthenon Capital and IAAI’s management to KAR Holdings. Both ADESA and IAAI became wholly owned subsidiaries of KAR Holdings.

The company said that it plans to use the funding proceeds of this IPO to pay down debt, pay termination fees to equity sponsors, and to fund general corporate purposes.  KAR has 214 physical auction locations and multiple proprietary Internet venues, and the physical locations are listed as a network of 62 whole car auction locations and 152 salvage auction locations.

In 2008, the company facilitated the sale of over 3.2 million used and salvage vehicles.  KAR also does not take title or ownership to substantially all vehicles sold at its auctions.  For the twelve month period ended June 30, 2009, the company’s revenues were $1.722 billion, and its Adjusted EBITDA was $371.8 million.

KAR is under a heavy debt load from its LBO two years ago, which is partly why S&P has a mere B- rating on the company.

Frankly, it is hard to know how the initial reception will be for this IPO even in a bull market.  Can you imagine the first call from the stock brokers to their clients?…. “Hi, before you hang up this is not a joke.  I am calling you about an IPO tied to the auto business….”

At least this is tied to the after-market because of salvage and whole car auction sales.  They are also not taking on the risk of owning the car.  That being said, the notion of how well this is received will end up being over pricing power and how sticky the banks and insurance companies are in the months and years ahead.

JON C. OGG
September 15, 2009