This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Gores Group May Slam Brakes On $1B Pep Boys Buyout

Stocks in this article: PBY

NEW YORK ( TheStreet) -- Private equity firm The Gores Group may hit the brakes on its $15 a share buyout of Pep Boys (PBY), as the auto parts and repair giant slipped to a loss in the fourth quarter of 2011, and reported weaker-than-forecast preliminary first quarter earnings on Tuesday.

In a regulatory filing released on Tuesday morning, Gores Group raised questions as to whether the "serious deterioration in Pep Boys business" since the company announced a late January buyout could precipitate a material adverse event, which would allow the buyer to cancel the deal. The notice sent Pep Boys shares sharply lower -- down close to 25% -- and at under $12, below the pre-buyout share price.

Gores Group said that it notified Pep Boys management on April 26 that it may try to cancel the buyout if a review of the company's finances shows that diminished sales and profitability counted as a violation of their January merger agreement.

"In light of this downturn, the projections provided to the board are no longer accurate, and Pep Boys may have experienced a material adverse effect or may have violated covenants contained in the Merger Agreement," Gores Group stated in the filing.

The Los Angeles-based private equity firm said they notified Pep Boys of their concerns on April 26 and will delay a special shareholder meeting to vote on the merger by 30 days to review the company's finances.

On Tuesday, Pep Boys said that it forecast revenue for the first quarter to be as much as $526 million, leading to a possible profit of between zero to $2 million -- earnings below management's forecast and an $8 million profit at this time last year. "Pep Boys believes that its first quarter results were below expectations due to a variety of factors occurring in the ordinary course of business," said the firm in a statement.

Pep Boys reported a fourth quarter loss of over $4 million on roughly 5% year-over-year sales growth to $505 million. That represented the Philadelphia-based company's first quarterly loss since the fourth quarter of 2009, a time when the U.S. economy was in recession and the auto industry was on the verge of collapse.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Pep Boys,the nation's leading automotive aftermarket service and retail chain, was valued at $1 billion in the buyout, which represented a near 25% premium at the time. The move to buy Pep Boys and its Manny, Moe and Jack brand, which has been around for more than 90 years, signaled a bet by the Gores Group on the auto industry and specifically Pep Boys' tires, parts and auto repair specialty.

The company was reported to have hired investment bankers to explore a sale in early 2011, following years of speculation that it would look for a buyer. Even with a 45 day "go-shop" period, analysts did not see any competing offers for the auto parts and services seller. "We do not expect another leverage buyout firm to counter-offer Gores Group and thus believe that the $15/share bid will be final," wrote Cabrera Capital Markets analyst Cid Wilson at the time of the deal announcement.

Founded in 1921 by the "Pep Boys" -- Emanuel "Manny" Rosenfeld, Maurice "Moe" Strauss, Moe Radavitz and Graham "Jack" Jackson -- the company has more than 700 auto repair and parts stores in 35 states and Puerto Rico. The company competes against O'Reilly Automotive (ORLY) and Advanced Auto Parts (AAP) and Autozone (AZN), among others in the automotive aftermarket.

Pep Boys' largest shareholder is North Run Capital Management with an over 8% stake. Other large holders include Glenhill Advisors, Dimensional Funds, River Road Asset Management and Vanguard Group, each with stakes over 5%.

For the Gores Group, the move wasn't its first foray into the autos market. In May, the private-equity firm bought auto body company Sage Automotive Interiors for an undisclosed price, and in 2007 the company bought vehicle logistics specialist United Road Services for $110 million.

For more on Pep Boys' shares, see Whitney Tilson's T2 Partners portfolio.

-- Written by Antoine Gara in New York

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,195.42 +221.11 1.30%
S&P 500 0.00 -2.75 -0.14%
NASDAQ 4,566.1380 +16.9120 0.37%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs