KAR Auction Services (NYSE:KAR) stock is up more than 40% after Carvana (NYSE:CVNA) agreed to buy its physical used-vehicle business for $2.2 billion.
Carvana says it will pay cash for KAR’s Adesa subsidiary, which is the second-largest wholesale vehicle auction in the U.S. Adesa currently operates 56 physical locations and processed more than 1 million transactions last year.
Shares of Carmel, Indiana-based KAR Auction rose as much as 70% to $22.10 per share following release of the news. Carvana’s stock fell, but is now trading up 1%.
What Happened With KAR Stock
What else do investors need to know about the deal? Importantly, Carvana said that this deal will help it increase its sales capacity, to as many as 3 million units a year. This announcement comes just as the company reported its fourth-quarter results.
Carvana said that, in Q4, it sold 113,016 vehicles. This resulted in $3.75 billion in revenue, up 57% year over year. While this is exciting, the picture isn’t perfectly rosy for CVNA stock.
Carvana also shared that supply chain issues will put stress on Q1, and announced that losses in Q4 widened to $182 million. The deal with KAR Auction Services could help buoy Carvana as 2022 kicks off.
Why It Matters
Investors likely know that used cars have emerged as a hot spot in the market as a result of the Covid-19 pandemic. If you need a refresher, reduced supply of new cars actually forced the prices of used cars higher. Taking advantage of this trend, Carvana leaned into e-commerce and home delivery.
What’s Next for KAR Auction, Carvana
Shareholders of KAR Auction are going to be rewarded today as KAR stock enjoys a massive jump higher. Long term, the acquisition could help Carvana’s business and share price.
However, until the deal closes, the purchase is likely to weigh on CVNA stock. The deal is expected to close by the end of this year.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.