O'Reilly Closing In on the Zone

A little sweet talking was all that was needed to get CSK Auto (NYSE: CAO  ) to agree to be purchased by rival O'Reilly Auto Parts (Nasdaq: ORLY  ) . That, and a few million dollars more in cash.

O'Reilly pursued CSK Auto for a year, first in private and then openly. Things could have gotten nasty, because CSK Auto spurned the initial $8-per-share public offer and then adopted a "poison pill" defense to prevent O'Reilly from starting a hostile takeover. In the end, they made nice, saying they adored each other.

The $1 billion deal (including $500 million in debt) will add CSK Auto's 1,349 stores -- mainly in the West -- to the 1,830 stores O'Reilly already operates, primarily in the Midwest and the Southeast. That puts O'Reilly firmly on the heels of No. 2 aftermarket parts dealer Advance Auto Parts (NYSE: AAP  ) which has more than 3,200 stores. AutoZone (NYSE: AZO  ) , with more than 4,000 locations, is the top chain.

O'Reilly undoubtedly realized it was going to have to sweeten its bid, something it had indicated it might be willing to do early on. It then also agreed to sign a standstill agreement, which temporarily halts a company's bid to acquire more shares. But is O'Reilly paying too much?

O'Reilly paid a 27% premium over Monday's closing price; CSK Auto had an enterprise value-to-EBITDA number of 9.4, while O'Reilly is priced at an EV / EBITDA of 8.7. Its closest competitors in the industry sell at even lower multiples and are more financially sound than CSK Auto.

Sure, the purchase will add "modestly" to 2009 earnings while also bringing cost savings of $100 million annually by 2010, but there are plenty of reasons why the acquisition could go awry.

CSK Auto's business also hasn't been stellar recently because of sluggish sales, increased costs, and higher rent, and its shares had fallen about 70% before O'Reilly went public with its offer in February. Pep Boys (NYSE: PBY  ) and AutoNation (NYSE: AN  ) haven't been able to find themselves in this sour economy, and Genuine Parts (NYSE: GPC  ) has indicated it's more interested in industrial acquisitions.

Although CSK Auto said it had about 20 interested parties, with the tight credit environment, it's questionable how many might have been able to come up with the cash. There's no question, though, that management maximized shareholder value, as it had promised.

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