ROCHESTER, N.Y. (Aug. 29, 2006) — Monro Muffler Brake Inc.'s planned $13 million acquisition of Strauss Discount Auto is possibly a dead deal after Strauss filed for bankruptcy protection.
Monro elected not to exercise its option to buy the remaining 87-percent stake of the automotive service chain though it left open the possibility of buying stores through the bankruptcy proceedings. A representative for Strauss said that option is unlikely as the chain plans to continue running its business and emerge from bankruptcy in a strong position.
Last November, Monro bought a 13-percent stake in R&S Parts and Service Inc., a privately owned company that does business as Strauss Discount Auto, for about $2 million. At the time, Monro said the deal would expand its presence in key markets as well as grow its tire business.
Earlier this year, Monro bought 75-outlet ProCare Automotive Service Solutions L.L.C. for $14 million in cash. Monro then put off the Strauss buyout, saying it “would not be prudent” to integrate two acquisitions at once.
Then on Aug. 10, R&S filed for Chapter 11 bankruptcy protection in Newark, N.J., claiming assets and liabilities of $50 million to $100 million each. In its filing, R&S said several factors hurt its business, including higher fuel costs causing consumers to delay purchases, “disappointing” winter and spring selling seasons and the resignation of several key finance employees. Several credit lines became overdue, the company said, and one went into default.
Monro said Aug. 11 that since it believed its $13 million offer was no longer fair, the company sought to lower the purchase price, but the two sides didn't reach an agreement. Monro also recorded a charge of $1.7 million in the second quarter as it wrote off its investment in the 13-percent stake, effectively calling the investment worth nothing, Monro President and CEO Robert Gross said.
“We concluded that the terms of our initial agreement no longer presented a viable basis for exercising the option in light of Strauss' financial condition and operating performance,” Mr. Gross said in a statement. “…We believe that Monro and its shareholders will be best served by exploring the purchase of selected Strauss assets through the bankruptcy process.”
But Ken Rosen, R&S' bankruptcy attorney, said the automotive chain does not plan on selling off “chunks” of its assets, though some underperforming stores may be closed.
“Monro knows very well that we're not selling any stores and we're not selling any assets,” he said.
In its court filing, R&S said it operates 94 retail store locations in New Jersey, New York and Pennsylvania. That total is down from the 101 stores the firm operated last fall. R&S posted annual revenue of $172.1 million in 2005.
Mr. Rosen said Strauss secured financing that will sustain operations during the bankruptcy proceedings—expected to last until year-end—as well as after. With the capital influx, Strauss has been restocking its shelves and watching its operating performance climb.
R&S filed bankruptcy principally to refinance its liabilities and actually has more assets than liabilities, Mr. Rosen said. The firm said it expects to repay its debtors, and Mr. Rosen countered the idea that R&S/Strauss is on shaky ground by pointing out R&S has available cash.
“You can't really argue that Rome is burning when you're sitting on $10 million of liquidity,” he said.
But Mr. Gross said that time—and Strauss' performance—will tell if Monro may be able to pick up some stores.
“I would think there would not be a lot of opportunity to buy stores (if Strauss' bottom line does improve),” he said. “If they continue to run consistent with how they have been, we would think there would be a lot of options to buy stores.”
As Monro wrote off its initial investment, Mr. Gross said he isn't determined to hold onto that. “If anyone wants to buy that from us, we're more than happy to sell it,” he added.
Mr. Gross said he will move on to other acquisition plans.
Monro also is continuing to integrate its ProCare business. Mr. Gross said in the Pittsburgh, Cleveland and Columbus, Ohio, markets the company will operate stores under the Monro and Mr. Tire identities only. Mr. Tire will be used for larger, more tire-specific stores while Monro will be used for a service format. About 30 ProCare stores have been changed to Mr. Tire and 45 to Monro.
Monro operates 702 stores and 16 dealer locations under the Monro, ProCare, Mr. Tire and Tread Quarters Discount Tires banners.