As the bidding war escalates, Pep Boys may be hitting a peak premium.
Although billionaire investor Carl Icahn isn't known as someone to walk away from a fight, the rising richness of the bidding battle between him and Japanese tire maker Bridgestone (BRDCY 1.39%) for auto parts and repair specialist Pep Boys (NYSE: PBY) made it plausible he would pursue easier game.
Industry peer Advance Auto Parts (AAP +2.55%) was recently thrown into the mix as a potential takeover target, and while rival O'Reilly Automotive (ORLY +1.06%) was seen as the most likely buyer, Icahn's name crept into the discussion too. There were a few good reasons the billionaire might have walked away from the Pep Boys battle, but Icahn's pugnacious nature ultimately won out and he bumped up his bid from $15.50 per share to $16.50 per share.
And with Pep Boys declaring Icahn's bid superior to Bridgestone's, the ball on matching the counteroffer once more or exceeding it is now in the tire maker's court. The market is bidding up the auto-parts retailer's stock well above Icahn's offer, suggesting investors think Bridgestone hasn't given up yet, but the company's reluctance last time to do more than just match Icahn's offer may mean we've reached a limit.
No good deed goes unpunished
The tire maker had tried to cut off discussions between Pep Boys and Icahn when it filed its amended plan of merger last time. In a section titled "Termination of Discussions with Icahn," Bridgestone demanded:
"The Company shall immediately cease and cause to be terminated any activities, discussion, or negotiation with Icahn or any other Person conducted heretofore by the Company, the Company's Subsidiaries or any of the Company's Representatives with respect to any Competing Proposal received prior to the execution of this Amendment."
Of course, Pep Boys has a fiduciary responsibility to shareholders to obtain the best price for its company, but it seems Bridgestone is weary of the back-and-forth and might not want to go through it again.
Certainly the deal's value is approaching a peak premium. O'Reilly was reportedly scared off from making a play for Pep Boys once bids exceeded $13 per share, and the tire maker may feel similarly put off. Indeed, while Advance Auto Parts lost all the gains it had made following the rumors of a potential takeover subsiding as no deal materialized, it may be more in play now than ever.
Could Advance Auto Parts serve as a backup plan for Bridgestone's global growth strategy?
Aftermarket afterburners
A recent Bloomberg article offered up a number of good reasons O'Reilly Automotive might want to buy Advance Auto Parts:
- Its made big acquisitions before, such as its 2008 purchase of CSK Auto.
- It gives O'Reilly access to Northeast markets where it has little presence.
- There would be little need to divest many stores because of a broad competitive presence from Pep Boys and AutoZone (AZO +0.66%).
While it's tempting to think Bridgestone could just as easily pursue Advance as it did Pep Boys, there are a few differences between the parts-and-repair service retailers that would make it unlikely.
Taking a fork in the road?
A Pep Boys merger would add approximately 800 locations to Bridgestone's existing network of 2,200 tire and automotive service centers, but Advance is substantially larger. Following its acquisition of Carquest last year, the aftermarket parts retailer operates more than 5,300 locations all across the U.S. and in Canada. That alone might make a takeover bid bigger than what was offered for Pep Boys.
Still, like its rival, Advance focuses more on the do-it-for-me market rather than the do-it-yourself side of the business. While the growing complexity of cars ought to make that business model preferable, a tough economy is pushing the DIFM market higher, and experts O'Reilly and AutoZone are the ones benefiting. Whereas the stocks of those two have gained between 20% and 30% over the past 12 months, Advance Auto Parts has fallen 7%. Its depressed valuation could make it attractive.
When Icahn acquired Auto Plus this past summer, he laid out a plan of growth by acquisition through large mergers to quickly build its "revenue and geographic impact." Pep Boys fits the bill for the investor.
It also suits Bridgestone's own efforts to accelerate a global growth strategy, but there may be more than just one path to achieve it.
