PhillyDeals: Pep Boys agrees to sale of $1 billion

Pep Boys Express on Allegheny Avenue, next to the headquarters of the 729-store auto-parts and car-repair chain in Phila. Pep Boys shares have lagged compared with rival auto-parts sellers.
Pep Boys Express on Allegheny Avenue, next to the headquarters of the 729-store auto-parts and car-repair chain in Phila. Pep Boys shares have lagged compared with rival auto-parts sellers. (TOM GRALISH / Staff Photographer)
Posted: January 31, 2012

Pep Boys - Manny, Moe & Jack, the Philadelphia-based, 729-store auto-parts and car-repair chain, said it had agreed to be bought by Los Angeles-based Gores Group for $15 a share, if share- holders approve.

"We'll be making further investments in the business, and there's going to be more stores," Ryan Wald, mergers-and-acquisitions director at $4 billion-in-assets Gores, told me.

The price beats Pep Boys' recent value of about $12 a share, but is only about half its peak price from the mid-2000s. The sale price is little changed from Pep Boys' value 10 years ago. During the same period, rival parts-sellers AutoZone and Advance Auto Parts have more than tripled investors' money.

Pep Boys employs about 19,000 at its Allegheny Avenue headquarters, four distribution centers, and stores. Chief executive Michael Odell and members of his management team have not yet signed contracts to work under Gores, "but they like our team. They are here to make our vision a reality," Odell told me.

"We're doing this deal because we believe in what this management has accomplished to date and where they're headed," Wald told me. "We run our businesses with a long-term view, as if we're going to own them forever," so long as they yield capital returns to the firm's investors, including founder Alec Gores, pension funds, and others. Pep Boys boss Odell has reversed the company's previous trend toward larger East and West Coast suburban stores and added smaller stores in the middle United States.

Odell, who has been talking to potential buyers since he took the top job in 2008, sent letters to Mayor Nutter and Gov. Corbett "letting them know we are not anticipating moving the headquarters," he told me after a 9 a.m. meeting with workers at the 92-year-old retail chain's headquarters.

"We're proud to be a Philly-based company, and we plan to remain a Philly- based company," he added. Odell also planned to meet Monday night with store managers at their annual gathering in Phoenix.

The Gores offer works out to about $790 million in cash, plus more than $200 million in Pep Boys debt, for a total "enterprise value" about $1 billion.

The price "is a 35 percent discount" to rivals like AutoZone and Advance, noted analyst David A. Schick at Stifel, Nicolas & Co. He estimated the value of Pep Boys' real estate alone at $760 million.

The price "significantly exceeds the appraised value. This is not a real estate play," said Gores' Wald. Other would-be Pep Boys owners have until March 14 to make a higher bid; after that, Pep Boys would have to pay Gores $25 million to kill the deal.

Wald said Gores partner Lee Bird has been collecting North American retail businesses like Pep Boys: "We're believers that the U.S. economy is rebounding."

Gores owns dozens of companies, including Michigan-based auto shipper and logistics specialist United Road Services and South Carolina-based Sage Automotive Interiors; there are no plans to combine them with Pep Boys. Other holdings include radio network Westwood One, which presents Philadelphia talker Michael Smerconish's show, among others.

Odell said he was looking forward to running Pep Boys as a private company: "One, we don't have to be as open with the world with our strategies. There's things you have to tell your shareholders - because you don't want to surprise them - but you don't want to tell your competitors."

Also, Gores brings "operational expertise" and "a more flexible capital structure" that will make it easier to raise money and finance acquisitions quickly. The companies have arranged sale financing from Barclays Bank P.L.C., Credit Suisse A.G., and Wells Fargo Bank.

The Pep Boys board - including professional investors such as Barington Capital Group boss James A. Mitarotonda, Woods Investment Co.'s John Sweetwood, and M. Shan Atkins of Chetrum Capital L.L.C., and Philadelphia accountant Jane Scaccetti - approved the sale unanimously in a Sunday meeting. No date has been set for the shareholders' vote. Gores hopes to close the deal by July.

Major shareholders who'll profit from the sale include Boston-based North Run Capital L.P., which bought 2 million shares in the fall, bringing its total to 4.5 million, or nearly 9 percent of Pep Boys, according to the federal Securities and Exchange Commission; and Glenhill Advisors L.L.C. of New York, which owns almost as much. Vanguard Group and other mutual-fund companies are also big shareholders. By contrast, Fidelity Investments sold most of its Pep Boys shares in the fall at lower share prices.


Contact columnist Joseph N. DiStefano at 215-854-5194, JoeD@phillynews.com, or @PhillyJoeD on Twitter.

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