What happened
Shares of Carvana (CVNA 3.29%) were moving higher today after the company adopted a "poison pill" strategy to dissuade any investor from gaining more than a 4.9% stake in the company.
As of 1:13 p.m. ET on Tuesday, the stock was up 5.4% after gaining as much as 17% earlier in the session.
NYSE: CVNA
Key Data Points
So what
In a news release this morning, Carvana said it had adopted a shareholder rights plan designed to protect long-term shareholder value by preserving net operation loss (NOL) carryforwards and other tax assets.
Ironically, the online used-car dealer's business has deteriorated enough that it now sees its history of operating losses as one of its biggest assets. Businesses can use NOLs to offset future tax payments, meaning an acquiring company could target Carvana, which now has a market cap of $1.3 billion, because it would save enough money from NOLs to make a buyout worthwhile.
As of the end of 2021, it had $193 million in net operating losses, though that number likely significantly expanded in 2022, and it finished 2021 with $1.64 billion in gross deferred tax assets, though it carries a valuation allowance of the same amount, meaning it does expect to benefit from those assets.
According to the rights plan, existing Carvana shareholders would be able to buy shares at a 50% discount, or Carvana could exchange each right for an additional share of Class A common stock, diluting any investor who tries to accumulate the stock.
Now what
A poison pill isn't typically a bullish sign for a stock, and in Carvana's case, it seems to be more of a reflection of the company's weakness, especially with it citing net operating losses. With losses mounting and $7 billion in debt on its balance sheet, Carvana could be headed to bankruptcy.
It's unclear if the company's rights plan was made in response to a specific threat, but investors are better off focusing on the underlying threats to the business, rather than any machinations to prevent an activist takeover.
If used car prices continue to fall, Carvana is likely to keep suffering.
