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Activist investor Carl Icahn is at it again. The legendary investor recently disclosed he holds a 12% stake in Pep Boys – Manny, Moe & Jack (NYSE: PBY), the auto-parts retailer. Icahn believes Pep Boys is a very valuable franchise, and because of its relatively small size (the stock sports a market capitalization of just $880 million), it could be a prized bolt-on acquisition for a bigger company.
Fortunately for Icahn, he has just the acquiring company in mind: Auto Plus, which happens to be owned by Icahn Enterprises (NYSE: IEP).
Here’s why Icahn sees so much potential in a Pep Boys sale.
Booming Auto-Parts Industry
Since the financial crisis and ensuing Great Recession hit, in 2008 and 2009, there has been an undeniable trend occurring: put simply, consumers are driving their cars into the ground. They are holding onto older cars for much longer, rather than buying new cars.
The reasoning is simple. New cars obviously come with great costs, whereas holding onto vehicles for longer periods of time and replacing parts as needed is a cost-effective option. Pep Boys is a primary beneficiary of this emerging consumer trend.
This has significantly boosted Pep Boys’ profitability throughout the year. The company reported an $18 million profit over the first nine months of the year, which comes out to $0.33 per share. That compares very favorably to a $0.6 million net loss in the same period last year.
However, Pep Boys’ results last quarter did not meet analyst expectations. The company earned $0.02 per share on sales of $508.1 million. On average, analysts expected the company to report profit of $0.06 cents per share on sales of $516 million.
In order to restore higher earnings growth, Pep Boys will need to cut costs. That’s where Icahn sees his opportunity to capitalize.
In Pursuit of Pep Boys
Icahn sees a great deal of synergy possibilities by combining Pep Boys with Auto Plus. This is indeed an attractive combination. The two companies each have costs that could be eliminated if they joined forces.
Icahn’s push to get Pep Boys to sell to Auto Plus comes at an interesting time. Pep Boys had already agreed to be taken over by Bridgestone in October, for $15 per share, in a deal worth more than $800 million.
Now, Icahn is essentially trying to upend that deal, and it may just work. That’s because Icahn Enterprises’ offer stands at $15.50 per share. And, when Pep Boys initially agreed to be acquired by Bridgestone, the pending agreement included language in which Pep Boys could conceivably get out of the deal if it received a “superior proposal” from a different acquirer.
That language, while relatively innocuous on the surface, could have big implications. Those two words may provide enough wiggle room to take a better offer. That is looking very likely, and Pep Boys acknowledged as much when it issued a press release stating that it expects the proposal from Icahn Enterprises to qualify as superior.
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