January 31, 2012 – Pep Boys (NYSE:PBY) has announced it has agreed to be acquired by top tier private equity firm The Gores Group in one of the largest take-private transactions so far this year. The deal values Pep Boys at roughly $1 billion. The Gores Group is paying $15/share cash, or roughly a 24% premium above PBY’s Friday close of $12.08/share. Pep Boys stock closed at $14.93/share on Monday and remains consistently above the $15 mark on Tuesday trading, signaling a revised final price or a competing bidder may be in the works. (Pep Boys negotiated a 45 day right to solicit superior offers. PrivCo data on take-private shows the typical window – if any- is usually 30 days). PrivCo has initiated financial coverage of soon to be private Pep Boys.
According to the terms of the deal:
- The Gores Group will put $489 million in equity into the deal, valuing the Pep Boys at just under $800 million, or an enterprise value of roughly $1 billion after PepBoys debt assumed by Gores Group is factored in.
- Pep Boys will have a 45-day window to shop for better offers although the proposed deal has the unanimous approval from the board, who are recommending shareholders approve the deal.
- The deal includes a $50 million reverse-termination fee if the acquisition doesn't close (at 5% of enterprise value, it’s a bit on the high side – PrivCo pegs the average reverse termination fee at closer to 3% - and it’s likely to deter many other bidders, as a superior offer would need to be materially above $1,050,000,000 to begin to break even for Pep Boys shareholders).
- Although it will still file its 10-K (annual report for 2011) this Spring as planned, Pep Boys will not hold an earnings conference call
- Pep Boys has suspended its quarterly dividend for 4Q2011 in light of the acquisition
- Deal advisors: Bank of America Merrill Lynch and Morgan, Lewis & Bockius LLP for Pep Boys and Credit Suisse, Barclays Capital, Sagent Advisors, and Skadden, Arps, Slate, Meagher & Flom LLP for Gores Group
Soon to be privately-held Pep Boys currently operates over 700 stores and 7,000 service bays in 35 states nationwide. Despite shares dropping below $3 in January 2009, Pep Boys has a tremendous upside as more people are holding on to cars for longer periods of time. The average age of cars and light trucks increased 4% to a record 10.8 years in 2011 due to increased economic concerns. It is a good time to be in the automotive repair business as consumers put off new purchases in favor of repairing their existing vehicles to extend their useful lives.
Although rumors of the deal began circulating early last year, Pep Boys and deal teams at Gores Group and BofA Merrill Lynch have been relatively tight-lipped, indicated by Friday’s closing price of about $12, well below the $15 deal price. Pep Boys will use the opportunity to expand its operations having already made several acquisitions earlier this month. The deal is expected to close by second quarter 2012.
UPDATE: JUNE 2012: GORES GROUP WALKED AWAY FROM THE TRANSACTION, CITING MATERIAL DETERIORATION IN PEP BOYS' BUSINESS