Carl Icahn Buys 12% Stake in Mario Gabelli's Pep Boys

Icahn may buy part of Pep Boys, frustrating Gabelli's plans for merger

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Dec 07, 2015
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Carl Icahn (Trades, Portfolio) disclosed a 12.1% stake in Pep Boys (PBY, Financial) on Friday, a company that has already agreed to sell itself and which has at least three Mario Gabelli (Trades, Portfolio) directors on its board.

Icahn purchased 6,558,083 shares of Pep Boys over the period from Nov. 24 to Dec. 4, for a grand total of $88.3 million ($13.46 per share on average). The stake gives him 12.12% of the company. Pep Boys is an automotive aftermarket chain with 800 stores in 35 states and Puerto Rico that primarily provides automotive maintenance, repair and parts for do-it-yourself clients.

In the filing, Icahn said he bought the shares because he was interested in acquiring Pep Boys’ retail automotive segment:

“The Reporting Persons believe that the Issuer's retail automotive parts segment presents an excellent synergistic acquisition opportunity for Auto Plus, a leading automotive aftermarket company wholly owned by Icahn Enterprises,” Icahn said in the filing. “To that end, representatives of the Reporting Persons have had, and intend to continue to have, discussions with the Issuer and various parties that participated in the Issuer's strategic alternatives review process regarding potential transactions involving the Issuer's retail segment.”

Another prominent investor, Mario Gabelli (Trades, Portfolio) of GAMCO Investors, holds 12.65% of the company, with 6,828,152 shares. Gallelli’s interest in Pep Boys stretches back to before 2010, but the past two years are notable for his continuous growing of the position to its current size. Gabelli has been angling for a sale of the company for at least as long, telling Bloomberg Surveillance that year:

“How do I make 50 percent back for my clients in the next 12 months? The answer is, you take a company like Pep Boys… they’re going to have some short-term negatives but they have a good balance sheet [and] good business model in the sense of selling tires… Pep Boys, I think, will be sold within 12 months,” he said.

Without a sale materializing, Pep Boys’ stock instead slumped roughly 19% from the beginning of 2012 through October of this year.

Gabelli in June had placed three new independent directors on Pep Boys’ board, and the company announced by the end of the month its intention to find a buyer.

It found a suitor on Oct. 26, when world’s largest tire and rubber company Bridgestone Americas Inc. agreed acquire the company for $15.00 per share, a 23% premium to its then-closing price. The $835 million transaction, structured as a tender offer for all outstanding shares, was expected to close in early 2016.

Pep Boys has had other encounters with Icahn this year, which it delineated Monday morning in a statement. Icahn and the company discussed a sale over six months, ending on Oct. 22 with Icahn declining to increase his offer above his $13.50 per share proposal.

Icahn has since made several other moves with the company, such as making a Hart-Scott-Rodino anti-trust filing on Dec. 4 and in his 13D filing, reserving his right to make other forms of transaction offers that would help him acquire Pep Boys’ retail business.

Icahn may have been taking the actions to gain negotiating leverage in purchasing the company and, “as a result, Pep Boys’ shareholders’ ability to realize the value presented by the Bridgestone offer may be frustrated,” the company said.

Pep Boys also announced its tepid third quarter results on Monday. The company’s sales fell 1.8% from the comparable quarter last year to $508.1 million, with a 1.5% decrease in service center revenue and 2.2% decline retail sales revenue. Earnings were $1.3 million, or $0.02 per share, compared to a net loss of $2.0 million, or $0.03 per share from the previous year. The third quarter results included a $6.0 million gain from the sale of two locations.

Pep Boys’ nine month revenue also fell 0.3% to $1.58 million, and net earnings were $19 million, or $0.33 per share, from a net loss of $0.06 million, or $0.1 per share, for the period last year.

Shares nonetheless rose 2.23% to $16.04 on Monday, above Bridgestone’s acquisition price, for a total advance of 35.3% in the past three months.

Longer term, the Pep Boys’ growth has been slow, as it increased revenue at an average annual rate of 1.2% and book value at a rate of 3.2% over the past five years. Over the same span, EBITDA declined at a rate of 15.1%, and it had two years of negative free cash flow. Its competitor, AutoZone (AZO, Financial), meanwhile had revenue growth of 15.8%, EBITDA growth of 17.3% and book value growth of 24.6% on average annually.

Gabelli mentioned Pep Boys on his Twitter account Sunday, asking, “Pep Boys (PBY, Financial) .... will market focus on repair side on Monday? Or?..”

He also tweeted, “Pep boys (PBY, Financial)..... Clients we have entrusted to us own 10 mill shares [sic],” on Monday.

Pep Boys is now one of Icahn’s several activist irons in the fire, most notably pushing for changes in recent months at AIG (AIG, Financial), Freeport-McMoRan (FCX, Financial) and Cheniere (LNG, Financial).