It would surprise me if Carl Icahn (Trades, Portfolio) is driven by value considerations because Pep Boys Manny Moe & Jack (PBY, Financial) trades at a forward P/E of nearly 50 and at a EV/EBITDA ratio of 15x.
Its Price/Book value of 1.59 is more modest. Returns on equity or RoIC haven’t been impressive over the past decade, and it is not immediately apparent what Icahn wants with his 12% stake in the auto parts retail and service business. He is the second-largest shareholder among the gurus after Mario Gabelli (Trades, Portfolio), who owns a slightly larger stake.
With Icahn you never know. He is famous for confusing people on the other side of the table and in the process, the public. I’m currently reading "King Icahn," and it is full of stories of how Icahn plays a lot of angles at the same time and doesn’t commit to one story. In poker this is one of two viable tactics of at-the-table behavior.
One approach is to show no emotion, reveal nothing, say nothing until the hand is over. This is the Warren Buffett (Trades, Portfolio) approach to deal making. He puts up a number without any talk or fanfare, but it is a take-it-or-leave-it offer, and he never comes back with more.
The other approach is to talk a lot all the time and confuse your opponents by engaging them in all sorts of conversations. They will be distracted and possibly reveal information themselves. This strategy is exemplified by Daniel Negreanu in poker and Icahn in business deal making.
There are various angles Icahn is playing here:
Bridgestone Americas made an offer through its subsidiary Pep Boys and Bridgestone Retail Operations, LLC to buy Pep Boys back on Oct. 26. Both companies appeared excited about this deal.
We are excited to join the Bridgestone family of companies to become part of the world's largest company-owned tire and automotive service retail network. – Scott Sider, CEO of Pep Boys
Bridgestone and Pep Boys are two leading companies that share a proud heritage in the American automotive services industry. Our shared expertise and commitment to our customers and employees will help us build an even stronger organization. – Gary Garfield
The transaction would close beginning of 2016 for $15 and would need to be approved by the boards of both companies.
Icahn is likely playing poker here. He is bidding $15.50 in order to get Bridgestone to raise its bid. Sometimes boards go with the lower offer anyway if it is being made by a much preferred counterparty but with Gabelli being a major shareholder of Pep Boys in addition to Icahn himself, that will be a tough sell.
Bridgestone has the option of foregoing another bid and have the company go to Icahn, but that’s not the end of the world for Icahn. Icahn Enterprises owns Auto Plus which is described as a leading automotive aftermarket company. Icahn Enterprises bought it at $340 million earlier this year from Canada’s Uni-Select Inc.
My guess is this isn’t Icahn’s preferred outcome as the valuation at Pep Boys looks like too much synergies would be required, but it is definitely additional leverage Icahn has in the negotiations. He can make a compelling argument he really wants the company for $15.50 and can achieve synergies and build out competitive advantages of scale as well.
The market is buying into the story as the stock now trades above Icahn’s bid, anticipating that Bridgestone will be enticed into a higher bid and possible rope-a-doped by Icahn even beyond $16. There is no one more skillful at dazzling and confusing you until you put your last penny on the table than Icahn.
