Ritchie Bros. plunges 20% on IAA purchase, deal called a 'head-scratcher'

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Ritchie Bros. (NYSE:RBA) plunged 20% after it announced a deal to buy auto salvage company IAA Inc. (NYSE:IAA) in a cash and stock deal valued at $7.3 billion. IAA fell 3.5%.

"Our initial take is that the deal is a head-scratcher in its timing, strategic rationale, and valuation, which clearly is catching the Street and us by surprise," William Blair analyst Lawrence De Maria wrote in a note. "A deal of this significance to move into an adjacent market is far from clear to us and follows the last large deal for Iron Planet several years ago, which was not an easy integration."

De Maria has a market perform rating on Ritchie Bros. (RBA). Ritchie (RBA) has a market cap of $5.6 billion including today's fall, while IAA has a market value of $5.1 billion.

The IAA deal also "follows the latest business model revamp, which has yet to gain significant traction," De Maria added in the note on RBA.

The sale announcement comes after activist investor Ancora Holdings in March called for IAA (IAA) to either put itself up for sale or replace its CEO. Ancora said at the time that it believed IAA could see $55/share in a potential takeout.

The announced IAA purchase price of $46.88/share represented a premium of ~19% to the closing share price of IAA on Friday.

Earlier Monday, Ritchie Bros. (RBA) also reported Q3 results.