For motorists who squirm at the prospect of haggling over a used car in a rainy dealership forecourt, Cazoo, which lets shoppers order fixed-price vehicles to their driveway, might seem like a priceless idea.
But the online dealer’s own value faces a stern test today when it completes one of the biggest ever listings of a British technology company.
The company – founded by serial entrepreneur Alex Chesterman – will complete a multibillion dollar “Spac” merger with Ajax I, a US-listed investment company, with the combined company debuting on the New York Stock Exchange tomorrow. The deal is set to make a billionaire of Chesterman, who founded Lovefilm before the company was sold to Amazon for £200m, and floated property website Zoopla at a £900m value in 2014 before its private equity sale four years later.
Cazoo’s $8bn (£6bn) valuation when the deal was agreed in March would make Chesterman’s stake worth about $1.8bn, putting him among Britain’s most wealthy technology founders. It would also lead to a large payday for early investor Lord Rothermere, the newspaper tycoon seeking to take Daily Mail publisher DMGT private.
The valuation has turned heads partly because of the speed with which it has been achieved. Founded less than three years ago, Cazoo was valued at $1bn just 14 months ago, meaning its value rose sevenfold in the nine months to March, when the deal was announced.
That is a reward for high growth: Cazoo’s revenues expanded sevenfold in the second quarter of the year. But to sceptics, it hardly seems enough to justify the multibillion dollar price tag.
Cazoo's listing is set to make a billionaire of founder and serial entrepreneur Alex Chesterman
The company’s pitch to investors is simple: billions of pounds of shopping has moved online, but most used cars are still sold the old-fashioned way. While 52pc of consumer electronics and 22pc of furniture purchases are made over the internet, just 2pc of cars are bought online.
This is despite apparently huge demand, which has spiked during Covid: the company points to surveys saying almost two thirds of consumers would buy used cars online, compared to just over a third before the pandemic.
“Alex knows how to upend industries,” says Alliott Cole, the co-chief executive of Octopus Ventures, who invested in the company’s first fundraising in 2018. “We backed him in a heartbeat just from a deck of slides.”
Customers and existing investors may rave about the company, but convincing Wall Street has been tricky. More than 70pc of investors in Ajax I, the “blank cheque” vehicle that the company is merging with, opted to receive their money back rather than becoming shareholders. High redemption levels are typical in Spacs, but Cazoo’s were above average.
Ahead of the deal being completed on Thursday, shares in Ajax I implied a valuation at just over $7bn, some $1bn less than when the deal was announced in March.
Any downgrade in valuation might provoke Schadenfreude among existing dealers, which have attributed the Cazoo deal to a frothy tech market rather than business fundamentals.
Its valuation led to car dealer bosses being welcomed at a recent industry event as “future billionaires”, the joke being that if Cazoo is worth nine figures, the incumbents are massively undervalued.
In the UK, 1.63m new cars were sold in 2020, a year in which performance was hammered by lockdowns. The long-term average is closer to 2m. The used car market is much bigger, with roughly 8m changing hands annually.
Used Car Transactions for United Kingdom
Pendragon, one of the UK’s biggest listed dealer groups, has about 160 outlets and, according to its last annual results, sold 91,000 used cars and 55,000 new ones, turning over £2.9bn. Its market value is just over £260m.
Cazoo, by contrast, recently trumpeted second-quarter sales of 10,692 vehicles. It expects sales of £698m this year, less than a quarter of Pendragon’s, although this is forecast to grow to £5.9bn in 2024. Profits, however, remain years away.
Pre-pandemic, the car dealer industry had undoubtedly been slow to adapt to online, relying on consumers’ reticence to move online for what is likely to be their second-largest purchase after a house.
“People want to kick the tyres,” says James Batchelor, contributing editor at trade publication Car Dealer, who recently abandoned an internet automotive purchase when he discovered damage to the car not revealed online.
Finding enough cars to sell could also present a problem. Production shutdowns caused by a global shortage of semiconductors mean shoppers unable to buy brand new vehicles have been pushed into the nearly new market, pushing up prices at unprecedented rates and hitting stocks in turn.
This issue isn’t so bad for established dealers who have relationships with manufacturers who supply them, but companies focused on used cars could find problems.
“He who controls the supply of new cars controls used cars,” says Daksh Gupta, boss of Marshall Motors, another big listed UK dealer. Marshall sources 70pc of the 44,000 used cars it sells annually through relationships with manufacturers as customers end lease deals with them. Those relationships may be more vital as electric vehicles win market share.
“Manufacturers have invested hundreds of billions in EVs and want deeper relationships with customers,” Gupta says.
UK car sales 2020 vs 2019
There are also anecdotal tales that Cazoo might not be as clued up as it thinks to the famously fleet-footed used car industry.
“There are stories of established dealer groups realising Cazoo’s pricing algorithms aren’t keeping up with the market,” says one source.
“I know some have been buying cars from Cazoo that are cheaper than they could get at auction. They then sell them on their forecourts.”
Cazoo’s pitch to investors instead focuses on its ability to win customers, pointing to its widespread brand recognition, helped by sponsoring Premier League teams Aston Villa and Everton. It is a strategy that has worked for Amazon, which has used its millions of customers to strong-arm suppliers.
The company does have a growth story. It is pushing into France and Germany, and has plans to conquer much of Europe. Supporters also point to the $61bn valuation of US rival Carvana.
For Cole, the venture capital investor, there is no reason why Cazoo cannot follow.
“European entrepreneurs are now getting in the habit of building businesses that endure and scale to several tens of billions,” he says.
“I see no reason why this will not be the case here.”