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Pep Boys deal appears to be sputtering

Gores Group, which agreed to buy the automotive repair chain in January, might be having second thoughts about the $1.1-billion deal. It asked Pep Boys to delay the May 30 shareholders meeting where it would be voted on. Pep Boys rejected the request.

May 02, 2012|By Andrew Tangel
  • Pep Boys announced lackluster preliminary financial results for its first quarter: zero to $2 million in profits. Above, a jumbo statue of Manny, Moe and Jack.
Pep Boys announced lackluster preliminary financial results for its first… (Brian van der Brug, Los Angeles…)

A Los Angeles private equity firm might be reconsidering its $1.1-billion buyout of Pep Boys.

The Gores Group asked the automotive repair chain to delay a May 30 shareholder meeting where investors were to be asked to approve the $15-a-share deal, according to regulatory filings.

The firm told the retailer that it wanted to take a closer look at "serious deterioration in the Pep Boys business." Pep Boys — which is based in Philadelphia but has 130 shops in California, the most in any state — said Tuesday that it would post disappointing first-quarter results.

The request to delay the meeting was rejected, and investors dumped shares of the company amid fears the deal could be scuttled. The stock plunged $3.31, or 22.2%, to $11.62.

Gores could be trying to get a better deal if the firm thinks it may be overpaying, given Pep Boys' "less than robust" results, said Scott Keller, president of DealAnalytics.com, a mergers-and-acquisitions research firm in New York.

"It seems to me they're threatening to play hardball," Keller said.

The company announced lackluster preliminary financial results for its first quarter: zero to $2 million in profit, or no more than 4 cents a share — far below the 23 cents Pep Boys earned a year earlier.

Cid Wilson, a longtime Pep Boys analyst who is now managing director for U.S. equity research at Princeton Securities Group in Fort Lee, N.J., said Pep Boys has had difficulty managing the retail and service sides of its business.

But recent higher crude oil costs probably squeezed Pep Boys from both sides of the income statement, Wilson said.

Higher oil prices, for example, make tires — already a low-margin product made from oil — more expensive, forcing Pep Boys to either eat higher costs or pass them on to customers already skittish because of high gasoline prices, he said.

"You need those tires to drive sales to get people into your stores," Wilson said. "You need people to come replace tires because that's where you get a lot of your maintenance work."

A milder-than-expected winter also probably led to lower sales, Wilson said.

"Anyone that had merchandise that was specific for the winter probably didn't do all that well in those particular categories," he said.

Gores, which agreed to buy Pep Boys in January, declined to comment.

Founded in 1921, Pep Boys had 738 stores in 35 states and Puerto Rico at the end of January. The company declined to comment but said in a statement: "The company has developed and is implementing strategies and tactics to improve results."

Pep Boys countered that its earnings were "below expectations due to a variety of factors occurring in the ordinary course of business" and noted it would elaborate when it files official earnings results with the Securities and Exchange Commission.

Pep Boys said it didn't believe it breached the merger agreement and had supplied its board with forecasts in good faith.

"If Gores has changed its view and simply wants to renegotiate price because it's not happy, that's not going to work," Keller said.

He said the firm can get out of the deal only if it proves Pep Boys breached the merger agreement — otherwise Gores might have to pay a breakup fee of $25 million to $50 million.

But usually in cases such as these, Keller said: "The two sides kiss and make up and agree to disagree."

andrew.tangel@latimes.com

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