The automotive repair and parts retailer's stock closed up over 16% Wednesday after the Wall Street Journal reported that private equity firms, namely San Francisco-based Golden Gate Capital, had "expressed interest" in acquiring the Philadelphia company.
The article, however, cautioned that Pep Boys had not yet hired an investment banker and there were no negotiations currently taking place.
The automotive aftermarket service company's real estate is worth about $700 million, or $11.50 per share, according to Brian Sponheimer, an analyst at Gabelli & Co., which is separate from the Gamco Asset Management unit that has an investment in Pep Boys.
Sponheimer said the company would make an attractive acquisition for either a financial or strategic buyer. He argued that the company's real estate can be valued at $11.50 a share after subtracting taxes and acknowledged that a sale-lease back arrangement for the real estate would result in rent payments subtracting from Pep Boys earnings.
Nevertheless, Sponheimer said that Pep Boys locations are in markets that could be attractive to strategic buyers including Advance Auto Parts (AAP) and O'Reilly Automotive (ORLY).
Pep Boys says its real estate and property is worth about $600 million, according to a 10-K for the fiscal year ended Jan. 31 filed with theSecurities and Exchange Commission on April 16. Even so, Sponheimer indicated that a strategic buyer, eyeing Pep Boys' locations, could make more sense.
And the target's enterprise value would be a bit rich for a leveraged buyout. With nearly $40 million in cash and cash equivalents and about $210 million in debt as of Jan. 31 according to regulatory filings, Pep Boys would have an enterprise value of $745 million based on a market cap of $575 million.
That valuation is a multiple of approximately 9.3 times the roughly $80 million in Ebitda Pep Boys generated in its most recent fiscal year ended Jan. 31, according to data provided by Bloomberg.
Private equity bidders would have to weigh the auto parts chain's poor historical performance, particularly when compared to competitors, against the amount of debt that could be arranged to finance such a transaction and the equity that would have to be sunk into a deal.
It should be noted that potential private equity-backed leveraged buyouts for Pep Boys fell apart twice in its history, the most recent being a deal in 2012. PE firm Gores Group agreed to a deal to buy Pep Boys for $15 a share and assume about $210 million in debt in January 2012, valuing the company at $1 billion.