Gores Group L.L.C., a Los Angeles-based investment firm, has offered to buy automotive aftermarket chain Pep Boys – Manny, Moe & Jack for roughly $1 billion.
Under the terms of the merger agreement, Gores Group—led by founder and CEO Alec Gores—will acquire all the outstanding common shares of Pep Boys for $15 per share in cash, which represents a premium of 24 percent over Pep Boys' closing price of $12.08 on Jan. 27, 2012, the companies said, and a premium of 36 percent over the retail chain's volume weighted average closing price over the last 30 trading days.
Pep Boys said its board approved the merger agreement unanimously and recommended that the company's shareholders approve the transaction. It is expected that after the transaction is completed, Pep Boys President and CEO Mike Odell and other members of the senior management team will continue in their roles with the company.
The agreement provides for a 45-day “go-shop” period and contains customary closing conditions, including receiving the approval of Pep Boys' shareholders and all applicable regulatory approvals. A special meeting of the company's shareholders will be held following the filing of a definitive proxy statement with the U.S. Securities and Exchange Commission (SEC) and subsequent mailing of the proxy statement to shareholders. Gores Group has fully committed financing and the transaction is not subject to a financing condition, according to both companies.
The transaction is expected to close in the second fiscal quarter of 2012. Following completion of the acquisition, Pep Boys will become a privately held company and its stock no longer will be traded on the New York Stock Exchange.
In anticipation of the transaction, Pep Boys said it has suspended its quarterly dividend.
Mr. Odell said partnering with Gores Group “delivers a significant premium for Pep Boys' shareholders and ensures a strong foundation for us to continue our expansion. Our board firmly believes that this transaction is in the best interests of all of our stakeholders and delivers an ongoing commitment to excellence for our customers and employees.”
Pep Boys itself has been on somewhat of a buying binge. The company said late last year that it exceeded its goal to open 50 Service & Tire Centers—its smaller tire and automotive service shop model—by opening 119 stores during the most recent fiscal year, 99 by acquisitions.
The company set a target in 2012 of adding at least 75 more Service & Tire Centers, Mr. Odell told Tire Business in an earlier interview, through what he called “organic” growth or taking over already-closed auto repair facilities and rebadging them.
He said the retailer was on the lookout for potential acquisitions, both small and large, but that any acquired tire and service stores will supplement the target number of 75 it planned to add, in addition to 10 Supercenters the company was looking to add in 2012. Those are Pep Boys' larger-format, parts and service outlets.
The added bankroll of Gores Group is likely to make expansion a little easier for Pep Boys.
Lee Bird, managing director of operations and consumer practice leader at Gores Group, said Pep Boys' “strong brand awareness and management's strategy to be the automotive solutions provider of choice for the value-oriented customer positions Pep Boys for growth. We are excited to help Pep Boys build on this vision and enable the company to take the brand and business to the next level by effectively scaling its powerful, differentiated service platform.”
Ryan Wald, the financial firm's managing director of mergers and acquisitions, noted that “for over 90 years Pep Boys has been the leading automotive service and retail chain, and we look forward to supporting the company's continued growth and expansion with our substantial equity resources.”
Pep Boys said Bank of America Merrill Lynch is acting as its exclusive financial advisor in the acquisition, and has provided a fairness opinion to Pep Boys' board of directors in connection with the transaction, while Morgan, Lewis & Bockius L.L.P. is acting as the chain's legal adviser.
The Gores Group's financial advisors include Credit Suisse Securities (USA) L.L.C., Barclays Capital and Sagent Advisors. Skadden, Arps, Slate, Meagher & Flom L.L.P. is acting as legal advisor to group.
Pep Boys operates more than 7,000 service bays in more than 700 locations in 35 states and Puerto Rico.
Gores Group said that since its founding in 1987, the firm has “successfully acquired and operated more than 80 companies across diverse industries with more than $15 billion in aggregate annual revenue.” In addition to Los Angeles, the group has offices in Boulder, Colo., and London.
Meanwhile, in the wake of the announced Pep Boys acquisition, law firm Brower Piven, which has offices in New York City and Maryland, said it has begun an investigation into possible breaches of fiduciary duty to current shareholders of the automotive aftermarket chain and other violations of state law by the Pep Boys board of directors.
Brower Piven said in a press release that its investigation “seeks to determine, among other things, whether the board breached its fiduciary duties by failing to maximize shareholder value.”
According to Brower Piven, its attorneys have more than 60 years' combined experience litigating securities and other class-action cases. A recent listing of actions the firm has undertaken shows it has launched several investigations for “possible breaches of fiduciary duty” relating to acquisitions in various industries.