Some Pep Boys investors got a little too greedy yesterday, but for those who didn't, it's been a fantastic week. And just in time to close the books on their funds for the year.
Billionaire Carl Icahn, through his holding company, is acquiring the Philly-based auto parts and maintenance chain for $18.50 a share. That is exactly double Pep Boys' stock price on May 19, the day before speculation arose that it was back in play. A premium that big is typically reserved for drug developers on the verge of a blockbuster medicine or hot tech targets. But hey, anything goes in the year of record deals. The transaction values Pep Boys at $1 billion, though Icahn already owns about 12 percent of the shares outstanding.
This is probably not the outcome most investors would have predicted for the bidding war between Icahn and Bridgestone. But in a surprising twist, Bridgestone pumped the brakes Tuesday night, saying that it wouldn't counter Icahn's latest proposal.
Pep Boys had originally agreed to sell itself to the Japanese tire maker in October for $15 a share, but then Icahn cruised on in, buying a stake and launching a bid. It was tough to guess whether he actually wanted the business or was simply looking to force Bridgestone to pay more. If it was the latter, Bridgestone only took the bait for so long. And its restraint, while disappointing for traders who bought above $18.50 Tuesday, may be smart.
Icahn had driven the deal price up 23 percent from what Bridgestone originally agreed to pay, sweetening his offer twice since last week alone. Of all the companies that were acquisition targets this year, none commanded that large of a bump following the private-auction stage, which is when any counteroffers are usually made and settled. (This is according to data that exclude deals smaller than $500 million.)
And yet, Pep Boys is a business grappling with declining same-store sales and the lowest operating margin in its peer group, which includes bigger chains such as AutoZone, O'Reilly Automotive and Monro Muffler. Icahn Enterprises controls $1.2 billion auto-parts supplier Federal-Mogul and also bought Auto Plus from Canada's Uni-Select for about $340 million earlier this year. To close the Pep Boys deal, his firm will have to pay a $39.5 million termination fee to Bridgestone.
Activist investors such as Icahn are playing a huge role in the global wave of consolidation, but usually as a third party ensuring that shareholders get the best deal possible, rather than the one making the bid. Whether Icahn's got on his activist hat or dealmaking hat, Pep Boys' shareholders think it goes great with his red suit.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
I say "back in play" because in 2012 another suitor, private-equity firm Gores Group, got cold feet.
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