The automotive evolution to Digital 3.0 revved a little higher Monday (June 29) as online car sales platform Shift announced it will go public in the third quarter via a complicated reverse merger arrangement.
The company announced that it will merge with Insurance Acquisition Corp. (IAC) in exchange for approximately $380 million in Insurance Acquisition Corp. Class A stock, as well as plus an additional 6 million shares of other IAC stock. IAC is what is known as a “blank check” merger company that trades financial assets for stakes in companies that will go public. IAC will change its name to Shift as the transaction proceeds and the Shift management team of CEO and Co-Founder George Arison and Co-CEO Toby Russell will stay in place.
“We are excited to partner with Shift and its world-class management team as it leverages its technology platform to disrupt the $840+ billion used car market,” said Daniel Cohen, chairman of the board of directors of Insurance Acquisition Corp. “With its tremendous, ongoing success in its core markets, we believe that this merger and its accompanying capital infusion will enable Shift to expand its product offerings and execute on its growth strategies.”
Arison said the move was about adding capital to scale the company. “Merging with Insurance Acquisition Corp. is the next step in our evolution and will enhance our ability to scale our operations as we continue to deliver one of the industry’s broadest selections of used cars via our powerful technology platform,” he said. “We look forward to partnering in a transaction that provides an efficient path for a successful transformation to a public company.”
Securing that capital is even more complicated than the IAC merger. In connection with the transaction, institutional investors, including Fidelity Management & Research Company, have committed to a $185 million private purchase of IAC after the deal closes. The combined company will retain up to $300 million of cash following the transaction, which will be available as the public offering takes shape. To boil the transaction down: IAC will commit to $380 million to Shift. It will then merge with Shift and change its name. After that, institutional investors will kick in $185 million before the company goes public, which is expected to be before Oct. 1.
A spokesperson for Shift indicated that the company expects the move will make online auto sales a three-horse race between Shift, Vroom and Carvana. It is an indication that online auto sales — both new and used — will be one of the behaviors that stick when and if the pandemic recedes. Shift has targeted urban markets using machine learning and a “speed to lead” sales approach to grow its market penetration to over 4 percent in its top-performing cities within the San Francisco metro area.
According to The Wall Street Journal, the coronavirus has boosted online car sales but it has not made a dent yet in overall sales. According to Ivan Drury, an analyst at Edmunds, together, Carvana, Vroom and Shift sold fewer than 300,000 cars in 2019, less than 1 percent of the used car market in the U.S.
“Investors are excited by the prospect of an entirely new market for online players to displace traditional sellers,” says the WSJ. “Carvana’s shares, which have climbed steadily since late March, have jumped eightfold since the company’s 2017 initial public offering. Vroom shares have more than doubled since its IPO early this month.”