It may seem like digitization of wholesale automotive is at peak intensity.

But it’s only the beginning, says KAR Global chief executive officer Peter Kelly.

And KAR’s agreement to sell its ADESA brick-and-mortar auction business in the U.S. to Carvana makes the company leaner and more financially flexible to capitalize on this increasingly digital environment.

That was part of the rationale Kelly and chief financial officer Eric Loughmiller outlined Friday in an investors call and accompanying presentation slides.

With the sale of its U.S. physical auctions, KAR divests a higher fixed costs business, the company said. It also allows KAR to repay existing debt, making the company more financially flexible to invest in growth opportunities.

The sale of the physical auctions accelerates KAR toward an operating model that’s more asset-light with lower overhead costs, it explained.

Additionally, Carvana becomes a new customer for KAR’s digital platform, as  KAR would be a technology partner to Carvana, supporting  the ADESA.com digital markeplace as well as the Simulcast and Simulast+ technology behind in-lane virtual sales run by ADESA and independent physical auctions.

The agreement between Carvana and KAR has the latter providing technology services for seven years, and potentially longer 

(“It's our expectation that if we deliver the services, it would go well beyond that, like it does with many of our private label clients and our technology clients,” Loughmiller said.)

Lastly, KAR said in its presentation slides that this move “solidifies KAR’s position as a digital marketplace leader with a large and high-growth market opportunity.”

Kelly and team have long emphasized the increasingly digital nature of wholesaling vehicles, and evidence of this pattern is certainly seen by its customers’ behavior.

Especially, among its commercial customers, where consignment has “migrated towards digital channels,” Kelly said. For example, some commercial customers of KAR sold 90% of their volumes last year through its OPENLANE upstream platform.

“We’re seeing a similar trend now occurring perhaps even more rapidly on the dealer consignment side of the business,” Kelly said. “Digital platforms like BacklotCars, TradeRev and CARWAVE (are) growing strongly, double-digit growth per annum, and shifting more volume and more market share towards those digital platforms.

“COVID has certainly accelerated those trends. But fundamentally, we still believe we're in the early stages of our industry's digital transformation.”

KAR believes it has a large and growing opportunity in this space, and will enter the coming years with a simplified, more asset-light, lower-cost business designed to capitalize on digitization.

“Our digital marketplaces provide low-cost, highly efficient venues for our sellers and our buyers to transact. And as we've said before many times, we believe that the digital model increases the total addressable market for our services,” Kelly said.

“Our leading digital brands, our platforms and technology will fuel our growth as this digital penetration continues to increase,” he said. “And that's going to be the focus of our company, our investments, our products, our operations and our people. And that's what we believe will generate the greatest benefits for our customers and ultimately deliver the greatest shareholder value to our investors.”

There are also some mutual benefits from the transaction.

The sale of the ADESA locations may also create potentially a better-use case for the auctions themselves. The move further digitizes KAR and cuts costs, but also provides Carvana with additional physical infrastructure needed to support its digital business.

Loughmiller said KAR “got a real strategic value for the business, but we also feel that the buyer had a significant strategic value to owning this property and having a higher use for relative to their business compared to what we're doing … we have said the use of our properties would evolve over time as we became more digital, and this accelerates the evolution of those properties focusing on reconditioning, focusing on logistics, but also maintaining an auction business as well.”

It's a “win-win” scenario for both companies, Kelly said.

“Fundamentally, Carvana has just acquired a nationwide network of facilities and capabilities that enables them to expand their geographic footprint in just about every major market in the United States,” Kelly said.

“And they're also getting a truly remarkable team with the ADESA team, a team that's passionate about customers, passionate about service, and just a great, great team  …  It's sort of a higher- and better-use type calculation that is part of this transaction. And I think it's consistent with the strategies of both companies, ours towards a more digital future. And obviously, Carvana they talked about (it) in terms of scaling their business well into the future.”

Perspectives from Carvana on the proposed transaction can be found here.