• Wed. Dec 6th, 2023

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Ritchie Bros. to buy IAA but headquarters to remain in Westchester

Ritchie Bros., based near Vancouver in Burnaby, British Columbia, proposes paying $10 a share in cash and giving IAA shareholders 0.58 shares of its stock for each of their shares. Ritchie’s stock dropped 18% after the deal was announced, which would reduce the purchase price to $5.3 billion.

Ritchie CEO Ann Fandozzi will run the combined company. IAA CEO John Klett will join the board of Ritchie Bros.

In most acquisitions, the buyer’s headquarters survive. In this case, two-thirds of the combined companies’ employees will be in the U.S., so the headquarters would move south. The deal means Chicago won’t lose another headquarters in what has been a difficult year that already includes the losses of Boeing, Caterpillar and Citadel.

But there are potential risks: The company declined to say whether Fandozzi will move to Chicago. The deal is largely predicated on cost-cutting. The companies expect to save about $100 million annually from back-office, finance and technology, general administrative and operational areas, according to an investor presentation. 

IAA has 4,400 employees. Ritchie has about 2,700. Ritchie shareholders will own 59% of the combined company.

IAA is one of several Chicago companies that are part of the auto insurance and salvage ecosystem, along with discount auto parts supplier LKQ, software firm CCC Intelligent Solutions, and Allstate, the fourth-largest auto insurer.  

Ritchie and IAA are auction platforms that connect buyers and sellers, but they’ve also added lucrative services such as inspections that bring in additional revenue. Ritchie specializes in heavy equipment, and IAA specializes in cars. The theory is that each can benefit from the other’s customers. Ritchie—which has 64 auction sites, including one in Morris, along Interstate 80—will benefit from adding IAA’s 210 auction yards. 

The proposed acquisition would give Ritchie an immediate shot in the arm. IAA’s revenue has soared as prices for used cars and parts have surged amid pandemic-related shortages. IAA’s roughly $2 billion in annual revenue more than doubles Ritchie’s top line. IAA revenue rose 30% in 2021 and was up 18% in the third quarter from a year earlier. Ritchie’s revenue was up 3% last year but grew 25% in the third quarter.

The acquisition marks another twist in the long journey of IAA, which got its start in 1982 as Los Angeles Auto Salvage but became known as Insurance Auto Auctions and moved to the Chicago suburbs in the early 1990s after it went public. The company was purchased by ADESA, a Carmel, Ind.-based company, in 2007, when ADESA went private. The company went public as KAR Auction Services in 2009, but KAR spun out IAA as a stand-alone public company in mid-2019.

The transaction with Ritchie would solve a big problem for IAA, whose stock peaked at about $66 per share at the beginning of 2021 and bottomed at $31.81 on Sept. 26, 2022. Earlier this year, an activist shareholder began agitating for a sale, arguing that IAA could fetch $55 per share. Richie offered $46.88 in stock and cash.

Investors haven’t warmed to the deal. Ritchie’s stock fell another 1.5% today to $50.50 per share, after sliding 18% yesterday. “No CEO would be happy to see their stock performance . . . and I’m no exception,” Fandozzi told Bloomberg Television. “But this deal is about the future.” 

IAA shares are down 3% since the transaction was announced.

“Our initial take is that the deal is a head-scratcher in its timing, strategic rationale and valuation, which clearly is catching the Street and us by surprise,” William Blair analyst Lawrence De Maria, who follows Richie Bros., wrote in a note to clients. “A deal of this significance to move into an adjacent market is far from clear to us and follows the last large deal for Iron Planet several years ago, which was not an easy integration. This also follows the latest business model revamp, which has yet to gain significant traction.”


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