CARY, N.C. -

There were only so many specifics KAR Global’s executive leadership could provide, pending regulatory approvals, but a conference call Tuesday with the investment community offered a glimpse into the strategy behind KAR’s agreement to buy BacklotCars for $425 million and what the dealer-to-dealer online auction platform may bring to the company.

First, the basics.

KAR announced Tuesday it has reached a deal to purchase BacklotCars, an online dealer-to-dealer wholesale platform, for $425 million.

The purchase is subject to certain regulatory approvals and other customary closing conditions.

Assuming those conditions are met, KAR expects the deal to close by the end of the year. Once it does, BacklotCars’ core leadership, including its four co-founders, will continue on with the company. KAR also plans to keep the company’s headquarters in Kansas City, Mo., where it was founded in 2015.

Justin Davis is the chief executive officer of BacklotCars and one of its co-founders.

In Tuesday’s release, Davis said: “KAR Global is the most innovative and progressive digital remarketing company in the world, and their entrepreneurial roots and culture are a great match for BacklotCars.

“We’re excited to expose Backlot sellers’ inventory to KAR’s active buyer base while expanding buyer access to quality wholesale inventory beyond their respective local markets,” he said. “We look forward to completing the transaction and leveraging the power of our combined technology solutions and industry expertise to help our companies and our customers succeed.”

This deal would augment what is already a bounty of digital marketplaces at KAR, which has purchased such entities as TradeRev, DRIVIN and CarsOnTheWeb in recent years, and acquired OPENLANE about a decade ago.

Which leads us to the question likely on the minds of many in the industry: Wait, doesn’t KAR already have a dealer-to-dealer platform in TradeRev?

Yes, but what BacklotCars brings is a bit different.

Similarities & differences with TradeRev

Though the product is “similar to TradeRev,” KAR chief executive Jim Hallett explained during the call that the actual format of its auctions is “slightly different” in that it uses a bid-ask marketplace that’s open 24-7. TradeRev uses timed auctions.

BacklotCars also uses auto mechanics to conduct its inspections, through a blend of employees and independent contractors. Additionally, it operates in 46 markets, including some where KAR does not have a presence, Hallett said.

In terms of the size of BacklotCars, KAR chief financial officer Eric Loughmiller said “it’s comparable” to TradeRev, declining to share more details until antitrust clearances are met.

As far as additional markets that BacklotCars would bring, Loughmiller said KAR could not get specific, again citing regulatory stipulations, but said “their focus has been in the middle of the country, the Midwest. And those types of markets where we may not have an auction operation would be what we’re referring to.”

He would later add, “There are markets where we both operate … and again, in many markets where one or the other probably has a more share in that local market than the other. So, we see a lot of synergies.

“They address the middle of the country and I would tell you they address many markets where they aren’t being served by the large physical auction businesses,” Loughmiller said. “So, we see a great deal of opportunity here. We’re excited about putting them together and think that we can actually have a strong offering to the buyers, and really give them an attractive offering to keep the process of selling wholesale used vehicles very efficient and cost-effective for the buyers and sellers.”

Asked if there was any overlap (with one being a timed auction and the other a 24-7 one) of dealers operating on both the TradeRev app and the BacklotCars app, Hallett said: “They could be operating on multiple apps right now and they will continue to operate on individual apps until we get to (the closing of the transaction). And then we’ll have to do decide how we go forward.”

More details on BacklotCars

Sharing what details they were permitted to on BacklotCars, Loughmiller said KAR noticed the company’s “very efficient capital model” and noted that BacklotCars has “incurred minimal losses.”

He added that BacklotCars has invested in inspections, with mechanics taking care of those and giving buyers “an expert” for that service. The company’s combined use of inside and outside sales “has been very efficiently deployed,” Loughmiller said.

He also turned to their bid-ask marketplace format.

“It takes the pressure off of a buyer having to be on his phone at the right time to make sure he gets the car. their listings will be up for anywhere from one to three days,” Loughmiller said. “They will execute the transaction very efficiently with a lot of information. And there’s actually a lot of interaction available between the buyer and seller as part of that process with their construct.

“So, it’s a very attractive model,” he said. “I would call it complementary to the offerings of KAR and we’re excited about adding them to our business.”

KAR declined to discuss the financial profile of BacklotCars, per regulatory guidance, “but I will tell you, the business operates very efficiently,” Loughmiller said, indicating KAR was “very pleased” with how the company has performed.

He said BacklotCars has “maintained modest losses throughout their history,” operated with an efficient model and grown quickly.

“There will be, we think, an opportunity for some synergy on the operations side, combining BacklotCars with the various offerings of KAR on the operations side,” Loughmiller said. “And we’re looking forward to getting those, that planning started as soon as we can, but not until we receive clearance and are able to work more closely with the Backlot teams on (what) the businesses will look like together.”

Funding and investment

In an earnings call earlier, KAR had mentioned it had roughly $1 billion in available cash on “and that number’s growing,” Loughmiller said in Tuesday’s call. KAR will use cash on its balance sheet to complete the BacklotCars transaction, he said, and it won’t draw on its revolver or incur any debt, Loughmiller said.

Asked about future investment in TradeRev, Loughmiller said: “We can’t say much and actually we can’t finalize our plans. At this point, both businesses will continue operating until we receive clearance on antitrust and close the transaction. However, when that’s completed, I think what you would expect is, we will continue investing in the dealer-to-dealer space, the capital needed to be competitive in that marketplace. I think you’ll see some synergies from the combined operations and you’ll see the investment continue.

“The good news is, as Jim (Hallett) mentioned in his comments, they’re very close to break-even. In fact, the path to profitability is very clear and apparent to us, for all of these businesses. And we think this strengthens the financial power of the organization, by having again, reaching scale at a much quicker pace by combining the two businesses, if we receive clearance, when we receive clearance.”

‘Why BacklotCars and why now’

You might be asking that same question. And in the conclusion to his opening remarks in Tuesday’s call, Hallett addressed that.

“First, our strategy is clearly directed at being a leader in the digital transformation of the wholesale auction business,” Hallett said. “We have also recently articulated our goal of increasing our market share to become more competitive in the dealer consignment segment of our business. 

“We have made many changes at TradeRev and have proven the business model can be profitable and we believe will be even more profitable at scale. And finally, the recent disruption of the wholesale auction industry has accelerated the adoption of digital transactions by both sellers and buyers,” he said. “I’m confident that the combination of BacklotCars with ADESA and TradeRev will accelerate our growth in the dealer consignment space.”

During the call, the executives were asked if KAR would put more emphasis on mergers and acquisitions going forward.

“I think the starting point is you don’t always get to pick the timing when opportunities come to you. And this is an example of that,” Loughmiller said. “BacklotCars initiated the process. We got involved very early and were successful in reaching an agreement. and hopefully we’ll close in the very short term — before year-end for sure, is our plan.

“And our priorities after that, again, we’re very focused on asset-light businesses and continuing the digital transformation of our industry … I don’t think we should decide whether it’s build versus buy and things like that. We’ll try to deploy capital the most efficient way we can, with a return on invested capital being the key component of our analysis,” he said.  “And we think this transaction has an opportunity for a very nice return on invested capital over the next several years.”

Adding more context, Hallett said it’s clear KAR has long been on a mission to digitalize the auction business.

“There’s certainly no question that COVID accelerated that transformation and it caused us to be able to react much earlier. We’ve continued to sell 100% of our vehicles in a digital format, and we want to make sure that we are addressing every segment of the market, that we’re providing a platform for every buyer and every seller,” Hallett said. “And I don’t think it’s one platform (that) takes all.”

And within KAR, there are several online platforms, including OPENLANE, TradeRev, ADESA.com, ADESA Simulcast and soon, BacklotCars.

Hallett emphasized that it’s about, “making as many vehicles available to as many buyers as we can across the entire nation. Not only here in the U.S., but in Canada, as well. And perhaps others in the future.”