Shares of Pep Boys - Manny Moe & Jack fell more than 20%, to around $8.60 a share, this morning after Mike Odell, boss of the North Philly-based service, tire and auto parts store chain, announced the cancellation of its sale to Los Angeles-based buyout investor Gores Group last night. Statement here.
Pep Boys trades at a discount to Autozone, Advance and other auto store chains, which are more focused on urban and immigrant clients who still fix their own cars. Odell told investors the $2 billion (yearly sales) company has plenty of cash and plans to keep expanding, thanks partly to the $50 million kill fee Gores promised to pay for leaving Pep Boys at the altar.
The cash will come in handy, but "Gores Group's willingness to pay a break-up fee without litigation is likely a bad sign of the current state of affairs at Pep Boys," wrote analyst David A. Schick this morning in a report to clients of Stifel Nicolaus & Co. The current price barely covers "the estimated value of underlying real estate" if Pep Boys were to close all 700 stores, he added.
The stock is now back to its woeful lows of last summer, after riding from January to April at Gores' $15 offer price, then tumbling below $12 on May 1 when the company first noted Gores was getting cold feet, following an unexpected fourth-quarter loss that Odell blamed on warm weather (less need for snow tires and driveway salt).
Odell also admitted computer-system and acquisition-integration problems. Those troubles raise questions about management's effectiveness in executing its business plan, according to Schick. No wonder Gores paid to walk away.