Carvana adopts a 'poison pill,' sells off $4 billion of auto loans

Carvana has adopted a “poison pill” to limit shareholders from raising their stakes and has reached an agreement to sell up to $4 billion of auto loans, the struggling used car retailer said on Tuesday.

The company’s shares gained 6.5% to $7.47 in afternoon trade.

Ally Bank and Ally Financial will buy the loans, the company said, giving Carvana a fresh source of funding as it tries to restructure its operations.

A “poison pill” is a strategy used by companies to prevent investors or competitors from taking control of a company. Carvana said the “poison pill” will help safeguard its “significant” U.S. federal net operating loss (NOLs) that could be available to offset its future taxable income.

The company’s ability to use the NOLs would be substantially limited if its 5%-shareholders increased their ownership, Carvana said.

Companies with large NOLs often adopt poison pills to enable them to cut their tax bill. Poison pills are also adopted to ward off hostile takeovers.

“This type of move does suggest a more defensive stance by CVNA’s board of directors, and likely eliminates any potential future institutions from gaining ownership control,” analysts at Raymond James said in a note.

Carvana, which some analysts say is in financial trouble following a rapid expansion during the pandemic, set a trigger of 4.9% for the shareholder rights plan.

The rights plan took effect on Monday and is scheduled to be in place until Jan. 15, 2026.