The Battle for Pep Boys is settled
It seems the battle for aftermarket specialists Pep Boys is finally set to settle, with Bridgestone Americas announcing just before New Year’s that it would not counter the latest offer from Icahn Enterprises.
The two companies had been engaged for several months in a financial tug-of-war for the Philadelphia-based business, which operates more than 7,500 service bays in more than 800 stores (Supercenters and Service & Tire Centers) in 35 states and Puerto Rico.
What will Icahn pay for Pep Boys?
Icahn’s offer of $18.50 per share sees the New York Stock Exchange-listed business valued at more than $1 billion. The almost century-old business saw its stocks rise to $18.94 a share on the back of the news — higher than the in-cash offer from Icahn and 93 percent higher than the company’s share price before the bidding war began. That put pressure on Bridgestone to increase its $17 a share offer significantly or pull out completely — which it did on December 29.
How the battle for Pep Boys began
The battle for Pep Boys began in October when Bridgestone offered to buy the company for $15 a share — or about $835 million. Everything looked like it was going according to plan until billionaire business magnate Carl Icahn threw a monkey wrench in the works. On December 8 Pep Boys informed the market they had received a “superior offer” from Icahn, 50 cents a share higher than Bridgestone’s offer. Bridgestone matched the offer, so Icahn replied with a $16.50 a share offer.
Bridgestone upped the ante to $17 a share, which Pep Boys accepted until Icahn countered with an $18.50 price tag the Japanese tire giant just wasn’t willing to beat.
So why all the fuss?
Pep Boys (the company’s full name is Pep Boys—Manny, Moe and Jack) was opened in 1921 by four Navy buddies who pooled $800 to start an auto parts supply store in Philadelphia.
It has gone on to become something of an iconic brand in the U.S. tire industry, serving all four segments of the automotive aftermarket — the do-it-yourself, do-it-for-me, buy-for-resale and replacement tires. It has some 18,500 associates, stores and service centers.
Pep Boys is also ingrained in our culture, featuring in TV shows like Mork & Mindy and The Simpsons, movies including The American President and Boys on the Side, and giving rise to the expression “everyone including Manny, Moe and Jack…”
But has Icahn paid too much?
While there’s a lot of goodwill in the brand, is Pep Boys a good buy for Icahn considering he paid $165 million more than Bridgestone was willing to pay in its initial offer? You’ve got to imagine a multi-billionaire wouldn’t just buy a business for sentimental reasons, but until Bridgestone announced its bid in October, the Pep Boys had been underperforming. Stifel Financial Corporation analyst James J. Albertine told Bloomberg this week the company “has averaged same-store sales declines of 1.6 percent” for the past decade and was in need of an overhaul — making it hard to justify a high valuation. Albertine told the media that company investors should “take the money and run.”
Pep Boys unadjusted financials, courtesy of Pep Boys Investor Overview.
But the company does generate income. It had $2.1 billion in revenues in the trailing 12 months to the second quarter of 2015 and has generated about $2 billion in revenues every year for the past decade. Just what that could become in Icahn’s hands, the market will just have to wait and see.
Here’s what Icahn himself had to say upon clinching the deal: “Since our acquisition of Auto Plus, our wholly-owned automotive aftermarket company, in June, we have been actively looking for an excellent synergistic acquisition opportunity like Pep Boys, which has enormous growth potential, strong brand recognition, and well-known, best-in-class customer service.”