Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Pep Boys, the chain of shops for car parts and maintenance work, agreed in October to sell itself to Bridgestone for $15 a share in cash. Little did investors know at the time that Bridgestone, the Japanese tire maker, was one of several acquirers to take a hard look at Pep Boys and that at least one of them -- Carl Icahn, the king of hostile deals -- would soon resurface to shake things up. 

On Monday, the billionaire corporate-raider-turned-activist-investor bested Bridgestone's offer with his own $15.50-a-share bid. That's after he disclosed a 12 percent stake Friday evening. Pep Boys' stock traded north of $16, for a market value of about $870 million, as some investors held out hope for a bidding war.

Manny, Moe, Jack -- and Carl
Shares of Pep Boys, founded by Navy pals 95 years ago, are at an eight-year high after receiving rival takeover offers from Bridgestone and Carl Icahn.
Source: Bloomberg

For one thing, Pep Boys' official merger document filed in November revealed no shortage of buyers. The problem was that none of them seemed to want the entire company. There was interest in either its services business or its retail business, but finding someone willing to pay a good enough price for the whole thing proved difficult until Bridgestone prevailed. 

Numerous suitors, yet so hard to reach a deal: Pep Boys shows how a multi-pronged business complicates mergers in a time when buyers want simplicity.

Pep Boys Peers
Pep Boys is smaller than most of the other U.S. publicly traded auto parts and services companies.
Source: Bloomberg

Even Pep Boys distinguishes between its two business lines, saying in a slideshow on its website that the services unit "presents the larger opportunity" because it's a fragmented market and fewer customers are doing repair work themselves, especially as baby boomers age. On the retail side, it's also up against the likes of AutoZone, a $23 billion chain, and $11 billion Advance Auto Parts. 

Bridgestone may have Pep Boys board's signature, but Icahn is in the driver's seat so long as he's offering the higher price and holds that big stake. That said, it's not like he hasn't walked away from deals many times before. Aside from Bridgestone and Icahn, the merger documents indicate there was a seemingly very interested "Party A," a strategic buyer, which wanted to do an all-stock deal. But even if Party A re-entered the ring, investors almost always prefer a cash offer.

The merger documents, though, point to another possible outcome. They show that at one point, even Bridgestone and Icahn may have considered a back-to-back transaction, or that Pep Boys may have suggested such a structure. Depending on who was the main acquirer, either Icahn would buy the company and sell Pep Boys' services unit to Bridgestone or Bridgestone would do it, and then sell the retail unit to Icahn. (Icahn is looking to extract synergies between Pep Boys and the smaller parts supplier, Auto Plus, which he bought from Canada's Uni-Select earlier this year.) 

It could still work out that way. 

Bridgestone and Icahn are competing against one another for a company each may only want in part. Rather than drive the deal price even higher, they'd be better off negotiating a way to both get what they want.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net