CITY OF COMMERCE, Calif.-Though still in the early stages of courtship, a proposed marriage between two of North America's largest independent tire retailers could produce an offspring to be reckoned with. On Oct. 31, AKH Co. Inc., a California-based retail tire chain with 125 retail outlets, approached the board of Big O Tires Inc. about acquiring that company for an undisclosed amount.
Publicly held Big O has about 370 outlets in 18 states and 41 associated dealers in British Columbia. It posted 1993 sales of $122.9 million.
AKH, based in City of Commerce, does business in California, Oregon, Washington and Utah as Discount Tire Centers, Evans Tire & Service Centers and David Early Tires.
The dealership reported retail sales of $97 million in 1993, and total sales of $135 million.
President Andy Andonian said AKH's proposal to Big O is subject to certain major contingencies, including obtaining financing, satisfactory completion of due diligence-``so that we know exactly what we're getting into''-and the negotiation of a mutually satisfactory acquisition agreement.
AKH also requested a 90-day period of exclusivity during which Big O would not carry on discussions or negotiations with any third parties regarding a business sale or combination with anyone except AKH.
In a Nov. 1 statement, Big O said its investment committee ``has requested that AKH enter into a confidentiality agreement with the company and demonstrate its financial capacity to conclude a transaction'' as a prerequi-site to any substantive discussions.
``In addition, the committee has advised AKH that it is unwilling to grant exclusivity.''
In fact, several other unidentified companies also have expressed interest in Big O, according to a major Big O stockholder.
Regarding AKH's offer, Mr. Andonian said he was confident the financing part of the puzzle wouldn't be a problem.
He told TIRE BUSINESS the acquisition likely would be bankrolled by some private investors and a yet-to-be-determined tire maker.
While Big O is primarily a franchiser, operating about four company-owned stores, only 13 of AKH's outlets are franchised; 112 are company-owned.
Mr. Andonian said he sees the deal as ``a perfect fit.'' It has always been AKH's goal, he added, to expand its franchise base.
``I think putting the two companies together and benefiting from the economies of scale would make sense for both,'' he said.
Big O President and CEO Steven P. Cloward, who is not directly involved in the negotiations, questioned how well the two companies would fit together, ``...considering our franchisees are in close proximity to most of AKH's stores.''
It's too early to tell whether the acquisition ever will see the light of day. But Kenneth W. Pavia Sr., Big O's second-largest shareholder, said, ``It sounds like a promising offer.''
Mr. Pavia could well be considered the catalyst for any sale discussions. He forced a June shareholder vote that compelled the tire franchiser to hire an investment banker to explore options to enhance the company's value, including its possible sale.
Mr. Pavia is a general partner in Balboa Investment Group L.P., Newport Beach, Calif., which controls a 9.6-percent stake in Big O.
The franchiser's largest stockholder is its own Employee Stock Option Program, which holds a 19-percent share.
Mr. Pavia, who is serving as an adviser to Big O's investment committee, could not discuss specifics of any offers, but said he has always maintained that ``the company is worth a minimum of $20 per share.'' Big O stock has recently been trading at about $16.
With about 3.36 million shares of Big O stock outstanding, a price of $20 per share would put the cost of acquiring the company at around $67 million.
``I've always felt that a strategic alliance of some sort, that would result in more critical mass for the surviving entity, was an important element of Big O's future success,'' Mr. Pavia said. ``To the extent that the AKH offer accomplishes that, I endorse it completely.''
He confirmed, however, that Big O has either signed or is in the process of negotiating ``several other confidentiality agreements'' with companies-``bigger, as well as smaller'' than AKH-that have expressed an interest in Big O.
If he and Mr. Andonian agree on anything, it is that Big O has had very slow growth over the last two or three years. ``With public money,'' Mr. Andonian asserted, ``Big O should have grown a lot faster than they have.''
Still, Mr. Andonian concedes that AKH has not been without its own financial shortcomings.
``We incurred big losses in 1993 from our wholesale operation, which we dumped at the end of last year,'' he said. ``We lost a lot of accounts receivable from that closing and, consequently, also lost our accounts receivable financing from our bank.''
AKH has had cash flow difficulties throughout 1994, Mr. Andonian said, but should overcome them by year-end.
But would an AKH-Big O combination be a marriage ``made in heaven''-or one of convenience?
Both companies offer the same kinds of services: tires, brakes, shocks and alignments. But where tires are concerned, they approach the market differently.
For the most part, AKH is a discounter of major brands, while Big O focuses on sales of its own Big O private label tires, which carry lifetime warranties.
The Big O tire lines are an important part of the company's appeal, Mr. Andonian said, as AKH has long been interested in merchandising its own exclusive product lines.
Big O also has a much stronger training program than AKH, he added.
Mr. Andonian said AKH's strength lies in its ``very aggressive advertising and marketing,'' something he believes Big O dealers do not have, but would like.
And because AKH is a private, family-owned company, he said its operations are ``very lean and mean,'' which could benefit Big O.
If the acquisition is successful, he sees few changes for dealers, though the new entity's clout would translate into reduced ``tire acquisition costs'' for them.