Deals

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

Did Carl Icahn just give an early Christmas gift to Pep Boys shareholders? Or is he the Grinch who may end up robbing them of a few extra bucks? 

Jacking Up The Price
Icahn's bidding war has pushed Pep Boys to its highest price since 2007.
Source: Bloomberg

The activist investor, locked in a bidding war with Bridgestone for control of the auto-parts and service chain, had already taken the lead in the contest this week after he increased his offer to $16.50 a share. Then, before Bridgestone had even responded with a counterbid,  Icahn upped the ante

He is now proposing to top whatever bid the Japanese tiremaker comes up with by 10 cents, up to a price of $18.10 a share. Pep Boys' board is giving Bridgestone until 5 p.m. New York time on Thursday to respond. `Twas the night before Christmas, indeed. 

Pep Boys shares responded to the news as if at least some investors are betting that the bidding will escalate: The stock climbed past Icahn's $16.50-a-share offer, though not past his $18.10 threshold. But at this point, Bridgestone may be better off just walking away. 

A bid of $18.10  a share wouldn't be crazy expensive relative to other retail deals, but it's starting to border on overpaying. Icahn's proposed maximum offer would value Pep Boys at about 14 times its Ebitda in the last year -- a multiple the auto chain hasn't seen since 2009.

Overpaying?
The high end of Icahn's sweetened bid implies a higher Ebitda multiple than Pep Boys has seen for years.
Source: Bloomberg

Sure, there's value in the chain's well-known brand and the opportunity to capitalize on an aging U.S. car fleet, but remember this is a company that's growing only minimally at best and whose profitability has been spotty.

Bridgestone,  looking to expand in the U.S., had originally struck an agreement back in October to acquire Pep Boys for $15 a share before Icahn barreled in. The tiremaker raised its offer once to $15.50, declining to make the knockout proposal Icahn was perhaps seeking to draw. Now there are even higher hurdles to cross to get to a winning proposal.

We're still not talking about a huge deal for Bridgestone in dollar terms. Even at, say, $18.50 a share, the total value would be about $1.2 billion including debt -- very doable for a company that is sitting on $4 billion of cash. But that's more than 20 percent higher than Bridgestone was originally offering, and it may just not be worth it.

According to Pep Boys' official merger document, Bridgestone was originally just interested in acquiring a small number of the company's stores as sort of a test case and potential prelude to a larger deal. The services business may be the more appealing part of Pep Boys for Bridgestone. How hard does it really want to fight to buy the whole thing -- especially when there may be another option?

As my colleague Tara Lachapelle has noted, there was discussion at one point of a back-to-back transaction, whereby Icahn would buy the whole company and sell the services unit to Bridgestone, or Bridgestone would buy the whole company and sell the retail unit to Icahn. Perhaps that deal could be revived.

Should Bridgestone walk away, Icahn's sweetened offer could be bittersweet for some Pep Boys shareholders. The billionaire would have no incentive to pay more than $16.50 a share if the tiremaker doesn't counter. If he had left his latest offer as is, perhaps Bridgestone would have offered $16.60 or $17, and then Icahn could have topped that, and so on -- even if the bidding didn't get all the way to $18.10.

Nevertheless, they're certainly getting more than they would have if Icahn hadn't come along in the first place. 

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

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

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