U.K.-based digital auto dealer Cazoo listed on the New York Stock Exchange on August 27 through a special-purpose acquisition company (SPAC) that valued the company (NYSE:CZOO) at up to $8 billion, which would be the highest value for a U.K. company trading in the U.S.
Under the terms of the business combination agreement, AJAX and Cazoo have combined under a new holding company, Cazoo Group. It was announced in a statement today that the new group will receive “over $1 billion before expenses from the transaction to further build out its brand and infrastructure.”
The group will continue to be led by founder and CEO Alex Chesterman who launched Cazoo less than two years ago. Since 2019 Cazoo has emerged as a wide-ranging business that encompasses used-car sales and subscription services following acquisitions of German car subscription service Cluno and U.K.-based automotive subscription service specialist Drover, which signalled its intent to expand into Germany and France by the end of this year.
A range of international tech investors weighed in with funds to help Cazoo build the business it wants by acquiring Imperial Car Supermarket, whose premises have been converted into customer collection centres, 19 so far, with the latest opened in Liverpool this week. Investors are betting that online car sales with the option of delivery or click and collect will prove popular with car buyers, a trend that has been accelerated by the pandemic in a market, the U.K. that already has high levels of online sales.
Initial trading has been reasonable and seemingly enough to encourage investors. In Q22021, Cazoo sold 10,692 cars, up 429% year-on-year when just 2,022 cars were sold in Q22020 and generated £141 million ($196 million U.S.) of revenue, up 605% y-o-y. Compared to Q12021, sales increased by 9.5% from 9,762.
However, there is strong competition in the U.K., from Volkswagen-backed marketplace HeyCar and new online auto marketplace Carzam, which said it was on course to sell more cars in its first year than Cazoo did in its first year. Constellation Automotive Group’s (formerly BCA Marketplace) online auto marketplace Cinch is another competitor, which is also reportedly planning its own stock market listing, looking for a similar valuation to Cazoo after securing investment worth $1.4 billion.
Some investors are not convinced that the valuation given to Cazoo is justified. They point to traditional car dealers who sell far more cars each year than Cazoo, but are valued far lower. For, instance Vertu Motors, which sold $4.2 billion of cars in the year to February 2020, is valued at just $258 million, according to a recent report in The Times.
British business newspaper City AM reports Hargreaves Lansdown analyst Nicholas Hyett outlining the two arguments:
“Online platform businesses are very valuable. Once one achieves scale, as Cazoo is rapidly doing, everything is effectively profit”, Hyett explains.
“The problem in applying that logic to Cazoo is that it is not just a platform business, it is also a used car business and that is a very capital intensive type of business. Even if they are very efficient at what they do, they still have to buy used cars at some point.”
In fact, Cazoo just started doing this, launching a car-buying service that provides customers with an instant valuation on their vehicle on August 16.
Chesterman will be in New York when the opening bell sounds at 09:30 ET today and the wider industry will watch with interest what happens to the stock valuation on its opening day and as the weeks and months progress.
“Since we announced the transaction earlier this year, we have continued to see record growth in our revenues and gross profit, said Chesterman.
“We have brought our UK vehicle reconditioning in-house, providing full control of our operations and logistics and have started buying and reconditioning cars in mainland Europe ahead of our launch later this year. And we have launched a fully integrated all-inclusive monthly car subscription service in the UK as well as our car buying service to source inventory directly from consumers.”