Canada’s Ritchie Bros Auctioneers (NYSE: RBA) has agreed to buy US-based vehicle marketplace Insurance Auto Auctions (IAA), in a deal worth around US$7.3 billion.
The multi-billion dollar deal will expand Ritchie Bros’ presence in the growing market of heavy machinery and equipment, salvaged cars, trucks and motorcycles, as well as auto parts.
Ritchie Bro’s share price plunged around 18% on Monday after the news.
Analysts believed investor unease came from the merger being an expensive gamble at a time when tie-ups in the automotive industry are experiencing more and more scrutiny from antitrust regulators.
Ritchie Bro’s chief executive officer Ann Fandozzi said despite the plunge, the deal was a perfect fit and offers significant growth opportunities for the Vancouver-based company.
“This transaction is truly one plus one equals four,” she said.
The deal will quadruple the number of auction yards for Ritchie Bros, as Ms Fandozzi urged scaling of the business was beneficial in providing a higher return on the technology investments the company has been making.
Its additions will also add to Ritchie Bro’s existing marketplace, comprising of farming, mining and construction equipment, as well as surplus government items and used cars and trucks.
Ritchie Bros boss caught off-guard by price plunge
Ms Fandozzi said she was caught off guard by the magnitude of the drop in the company’s share price on Monday, but does admits she was warned of some change prior to agreeing on the deal.
She said the company’s financial advisers on the deal, which included Goldman Sachs, Guggenheim Securities and RBC Capital Markets warned of the potential plunge, as traders would engage in merger arbitrage.
However, she didn’t expect the fall to be so great.
“We should know in the coming days if this is an arbitrage play or actual sentiment from our existing investors,” she said.
She urged if it was to be “actual sentiment” from its investors, the company would seek to better educate on the merits of the deal.
“No chief executive officer would be happy to see their stock performance today, and I’m no exception. But this deal is about the future,” she added.
Raymond James (NYSE: RJF) analyst Bryan Fast said the reaction by investors was an act of uncertainty.
“A lot of people own Ritchie [stock] because they dominate in the equipment space, and they know that space really well, and now they’re going outside it,” he said.
Financial implications of the deal
As the deal is finalised, both parties expect to benefit from annual cost savings of US$100 million to US$120 million by the end of 2025.
The combined company is expected to generate “hundreds of millions of dollars” of cash flow, which will help cover the debt that is being used to finance the acquisition.
Also, calculations see pro forma revenue over the past 12 months of US$3.8 billion and free cash flow of US$800 million.
The figures put forth are more than double what Ritchie Bros had as a standalone company over the duration.
Ritchie Bro’s latest quarter showed the company is doing much better than anticipated, as revenue rose 25% to US$412 million compared to the previous corresponding period, and profit increased 33% to US$43 million.
As per the deal, Richie Bros would take on US$1 billion in debt in a rising-rate environment, which potentially played its part in the share price plunge as it scared investors.
The deal awaits shareholder approval from both companies, but is expected to take place in the first half of 2023.