Cazoo van and car
Source: Cazoo Facebook

Cazoo Has a Lot of Potential as Merger Vote With Ajax Nears

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Aug. 9 2021, Published 9:53 a.m. ET

The rental car industry is booming and used car prices are at an all-time high. Amid this background, the SPAC AJAX 1(AJAX) scooped up Cazoo as a merger target. Both of the companies announced the proposed merger in March. The vote for the approval of the business combination is due in a few days. As the merger date gets closer, investors wonder if AJAX stock will go up before the Cazoo merger.

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Cazoo is a UK-based startup that operates an online marketplace for secondhand cars. The company was founded in 2018.

AJAX-Cazoo merger date

As part of the deal, Cazoo will receive $1,605 million in gross proceeds including $805 million cash in trust from AJAX I and an $800 million PIPE. The transaction values Cazoo at a pro forma enterprise value of about $7.0 billion and a pro forma equity value of nearly $8.1 billion. After the merger closes, Cazoo will remain listed on the NYSE but its ticker will change to "CZOO." Cazoo will use the funds from the deal to build out its brand and infrastructure.

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cazoo user car industry
Source: Cazoo Facebook

The meeting date for Ajax’s shareholders to approve the deal is Aug. 18. The meeting will be held at 10:00 a.m. ET. Usually, after a successful vote, the company takes on a new ticker the next day or within the next few days.

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AJAX stock forecast

Ajax stock isn't covered by any Wall Street analysts yet. The company's stock forecast will depend on how well Cazoo performs after the merger. Ajax’s shareholders weren't thrilled about the SPAC choosing Cazoo as its merger target. However, Cazoo's outlook is strong given the potential of used cars and rental car services in the current market environment. The price of Carvana, Cazoo’s U.S.-listed peer, has almost doubled in the last year.

Is Cazoo a good investment?

The used car market is booming amid the current chip shortage. Probably, this is the reason that Carvana hit a 52-week high recently. The chip shortage is expected to continue to weigh on the market. Even in the long term, Cazoo's outlook for the used car industry is strong.

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According to Cazoo, the used car market in the UK and the rest of Europe represents a total addressable market of about 500 billion pounds. This market also seems ripe for digital disruption, according to Cazoo. Just 2 percent of the used car market is currently digitized compared to 52 percent for consumer electronics and 32 percent for clothing.

Since the COVID-19 pandemic has accelerated the shift from offline to online, Cazoo thinks that it can take advantage of the trend. The company also thinks that it's tracking the growth path and projections like U.S.-based Carvana did in its early days. The UK offers a few more advantages compared to the U.S., including:

  • Higher online penetration of 22 percent versus 11 percent for the U.S.
  • Average car ownership in the UK is just 3.5 years compared to 5 years in the U.S.
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Will AJAX stock go up before the merger?

While Cazoo has strong growth potential in the long term, it isn't necessary that the stock goes up in the short term before the merger. In fact, the price action in SPACs usually remains quite choppy just ahead of the merger approval. A large number of SPACs have gone down immediately following the listing. However, since AJAX has already dropped below its listing price of $10, the stock might have an upside going into the merger.

Should I buy AJAX stock now?

AJAX stock is currently trading at a discount to its listing price and the SPAC floor price of $10. At this price, its pro forma enterprise value comes out to be $8 billion. This implies an EV-to-2022 revenue multiple of 3.87x, which is reasonable. The company expects to reach profitability in 2023. While the company’s own projections should be taken with a pinch of salt, given Carvana's growth progression, the forecast doesn’t seem too out of line. At the current discounted price, AJAX stock seems like a good bet.

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