Is Buyout of Pep Boys Going Bad? (PBY, AZO, ORLY)

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On April 26th, Gores Group LLC asked Pep Boys – Manny, Moe & Jack (NYSE: PBY) to delay a special shareholders meeting by 30 days in order to give the private equity firm time to figure out what has caused the auto parts dealer to turn in such awful numbers for the first quarter. Gores had likely seen the writing on the wall that Pep Boys revealed to the rest of us today.

In a preliminary report on first quarter results, Pep Boys projected revenues of $524-$526 million, sharply lower than the consensus estimate of $558.3 million and EPS in the range of flat to $0.04. In the same period a year ago, Pep Boys showed revenue of $5.135 million and EPS of $0.23. The company had only this to say this morning: “[F]irst quarter results were below expectations due to a variety of factors occurring in the ordinary course of business.”

Competitors Autozone Inc. (NYSE: AZO) and O’Reilly Automotive Inc. (NASDAQ: ORLY) had no such “factor” to report during the first quarter as both handily beat expectations. So what’s up with Pep Boys and the Gores takeover at $15/share?

One analyst told Bloomberg News that Gores was aware of the possible downturn in Pep Boys’ business in January when the acquisition was being discussed:

There is no way [Gores] can pretend that this wasn’t what was represented by management. They will have a tough time getting out of the deal because “they already revised the offer because of recent performance,” [the analyst] said.

But if Gores really has cold feet about the deal and can wangle a way out of it, even temporarily, Pep Boys’ shareholders may not like the results.

Shares of Pep Boys are down about -24% at $11.35 in mid-afternoon today, within a 52-week range of $8.18-$15.46.

Paul Ausick

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