Pep Boys is poised to become part of Carl Icahn's portfolio now that tire maker Bridgestone has ceded the field to the billionaire investor. Image source: Mike Mozart via Flickr.
So who will Bridgestone (NASDAQOTH: BRDCY) pursue now? The Japanese tire maker finally bowed out of the bidding war for Pep Boys (NYSE: PBY) after billionaire investor Carl Icahn trumped its last offer with one for $18.50 a share and made it clear he was willing to spend what it took to win.
Although Bridgestone had gamely tried to counter Icahn's offers in a series of tit-for-tat exchanges, with Pep Boys bemusedly sitting back and saying first one side's offer was superior, then the other, it became quickly apparent the tire maker was tiring of the game. It had attempted to cut off all communication between Pep Boys and Icahn by including language in its amended offer precluding the aftermarket auto-parts and service center from negotiating any further with the investor. It also increased the breakup fee Pep Boys would have to pay if their deal fell through. But Icahn returned with a follow-up bid Pep Boys couldn't ignore.
Bowing out gracefully
And so Bridgestone finally relented and said it would not match or top Icahn's last offer, which effectively valued Pep Boys at around $1 billion. It was reaching a peak valuation, anyway, as even Icahn was getting leery of the breakup fees that the auto-parts retailer was going to have to pay if he won. The hedge fund operator noted that if Bridgestone parried his offer and upped the termination fee again, even he would have to reconsider staying in the game.
Yet it was the tire maker that blinked first, and that ought to lead investors to wonder if Icahn overpaid for the opportunity. It was said O'Reilly Automotive (ORLY +1.08%) had been in the early bidding on its rival, but it quickly got out after the bids surpassed $13 per share.
A good value?
Whereas rivals Advance Auto Parts (AAP +1.20%), AutoZone (AZO 1.34%), and O'Reilly are all profitable to varying degrees, Pep Boys has lost money over the past year, and any profits it has made have been dwindling quickly. In its third-quarter earnings report, Pep Boys said sales fell 2%, as comparable-service revenues from DIFMs ("do-it-for-mes") dropped 2.5% while comparable-merchandise sales from the DIYers fell 1.6%.
That, of course, was part of the attraction of buying the auto-parts retailer. Because there is a vibrant, growing, and potentially lucrative market for people needing someone to fix increasingly complex autos, finding the right components to turn the retailer around could be a profitable endeavor. It's one of the reasons Advance Auto Parts was also seen as a potential takeover target itself after an activist investor established a stake in the company.
The DIFM market represented by Pep Boys and Advance Auto Parts hasn't performed as well as the DIY end. Image source: Mike Mozart via Flickr.
Hedge fund Starboard Value has said Advance's stock could double to around $400 a share if operational and structural changes were made to the business. Like Pep Boys, which realizes almost 56% of its revenues from repair services, Advance Auto Parts also focuses more on the DIFMs, generating 57% of its revenues from the segment. In contrast, rivals AutoZone and O'Reilly are the opposite, concentrating more on the DIYers, where they generate 82% and 58% of their revenues, respectively.
A good mechanic is hard to find
It was also one of the reasons tire maker Bridgestone was after Pep Boys. The tire maker doesn't just sell tires: It also operates a network of 2,200 tire and automotive service centers. The auto-parts retailer would have added 800 more. But that's why Icahn wanted it, too.
The activist investor purchased Auto Plus this past summer and laid out at the time a strategic plan of growth to quickly build its "revenue and geographic impact" by making large acquisitions.
Bridgestone also has geographic growth ambitions, meaning it's a situation that could lead the tire maker to pursue Advance Auto Parts instead. But because it is substantially larger and financially healthier, Bridgestone might have to pony up more for an offer, and O'Reilly was rumored to be interested, too. Advance has more than 5,300 locations all across the U.S. and in Canada.
The main problem facing Pep Boys, and to a lesser extent Advance -- but benefiting AutoZone and O'Reilly -- is the sluggish economy that keeps driving people to fix their own cars instead of taking them to the shop. With little prospects for a change in that dynamic, Bridgestone may end up being happy it lost the bidding war, particularly if it finds a better partner with a better balance skewed toward do-it-yourselfers and away from do-it-for-mes.
