In the escalating battle for Pep Boys (NYSE: PBY), a subsidiary of Japanese tire maker Bridgestone (OTC:BRDCY) on Friday agreed to match the higher offer made by billionaire investor Carl Icahn of $15.50 per share, or $863 million. The aftermarket auto repair specialist had been forced to admit the activist's investor's bid was superior to the $15-per-share offer made by Bridgestone in late October, but on Friday it said the tire maker had added an additional $28 million in cash consideration, and Pep Boys said Icahn's offer was no longer a "superior proposal."
Does it matter?
Investors stand to benefit if a bidding war breaks out between Icahn and Bridgestone, but it's not clear exactly how much more the billionaire -- or the tire maker, for that matter -- would be willing to pay. It's telling that Bridgestone only matched Icahn's offer and did not exceed it. The challenge for either buyer will be waiting for the aftermarket parts market to turn in Pep Boys' favor. Where AutoZone (NYSE:AZO) and O'Reilly Auto Parts (NASDAQ:ORLY) realize more than half their revenues from DIYers, Pep Boys and Advance Auto Parts (NYSE:AAP) cater more to the do-it-for-me crowd, generating 57% and 56% of their revenues, respectively, from this segment. However, despite the growing complexity of cars and the difficulty of doing your own work on them, both Pep Boys and Advance lag their peers as the DIY segment remains strong in a difficult economy.
The market, though, seems to think a counteroffer will be made by Icahn, as Pep Boys' stock is trading well above the current offer from either suitor. Pep Boys cash flow is valued at about half that of the other parts suppliers, suggesting bids could go higher, but it is also the only one of the four that's losing money, so it may fast be approaching a ceiling.
Pep Boys recommends investors accept Bridgestone's deal, as they did previously, which seemed to encourage Icahn to finally raise his own after long refusing to do so. He's proven in other deals not to give up easily without a fight, and the tire maker, which already seems to be limiting its vulnerability, may not have the fortitude to do battle for very long.