KAR Auction Services and Automotive and Initial Public Offerings and Transportation, Distribution & Logistics

UPDATE: KAR Auction IPO raises less than hoped

December 10, 2009

KAR Auction Services Inc. shares will make their trading debut Friday, but the auctioneer of used and salvaged vehicles raised less than it had hoped in its initial public offering. The company's IPO priced well below its expected range at a time of deep uncertainty in the auto industry.

KAR, headquartered in Carmel, Ind., expected to raise $340.9 million through its IPO. It planned to sell 23 million shares, which were expected to price between $15 and $17. But late Thursday, the company said it would sell 25 million common shares at $12 each for total proceeds of $300 million.

Underwriters have a 30-day option to purchase up to another 3.75 million shares — up from 3.45 million as originally planned. If the option is exercised, KAR expects to bring in another $45 million.

A slew of high-profile banks are underwriting the offering, including Goldman Sachs, BofA Merrill Lynch, Credit Suisse and JP Morgan. The stock is expected to trade on the New York Stock Exchange under the ticker symbol "KAR."

KAR said it plans to use most of the proceeds from its IPO to shrink its debt. That plan has earned the approval of credit ratings agency Standard & Poor's, which said recently it could upgrade KAR's junk-level credit rating if it cuts its debt as planned.

Vehicle sales in the U.S. have been at historic lows this year as the recession weighed on consumers' pocketbooks. With fewer people buying cars, fewer used and salvage vehicles are entering the marketplace, weighing on KAR's revenue.

"Their business is down," said Scott Sweet, senior managing partner at IPO Boutique. "Whether that improves in 2010 is subject to the same guess as if unemployment does."

KAR also has a heavy debt load. According to a regulatory filing, it owes creditors $2.5 billion. However, it still has $300 million in borrowing capacity.

"Wall Street right now does not look favorably at heavily debt-laden companies," Sweet said.

KAR took in $1.77 billion in revenue in 2008, but it lost money during that time. For the first nine months of this year, KAR had $1.31 billion in revenue and made a profit of $17.9 million.

On the bright side, most automotive analysts expect vehicle sales in the U.S. to rebound next year. Edmunds.com, an automotive research Web site, said it expects Americans to buy 11.5 million cars and light trucks in 2010, compared with 10.3 million this year. The market for leased vehicles — which virtually dried up during the recession — is beginning to recover. Both trends should help replenish the supply of used vehicles entering the market.

In addition, there is a high barrier to entry in the vehicle auction market, making it unlikely that it will face many new competitors in the future. Much of KAR's existing competition are smaller players that pose little threat.

The one exception is Manheim, an Atlanta-based auctioneer owned by media giant Cox Enterprises Inc. Manheim has been in the auto auction business since 1945 and controls about 50 percent of the market. KAR subsidiary Adesa controls 21 percent.

KAR's IPO is the second in the auto sector this year. In September, A123 Systems Inc., which makes lithium-ion batteries for electric cars, raised $437.5 million in one of the most successful IPOs of the year.

Investors have high hopes that A123 will become a major player in the fledgling electric-car industry. Vehicle auctioning, on the other hand, is a mature business with less room for growth.

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