Gores Group said that it notified Pep Boys management on April 26 that it may try to cancel the buyout if a review of the company’s finances shows that diminished sales and profitability counted as a violation of their January merger agreement.
“In light of this downturn, the projections provided to the board are no longer accurate, and Pep Boys may have experienced a material adverse effect or may have violated covenants contained in the merger agreement,” Gores Group stated in the filing.
The Los Angeles-based private-equity firm said it notified Pep Boys of its concerns on April 26 and will delay a special shareholder meeting by 30 days to review the company’s finances.
On Tuesday, Pep Boys said that it forecast revenue for the first quarter to be as much as $526 million, leading to a possible profit of between zero to $2 million — earnings below management’s forecast and an $8 million profit at this time last year.
“Pep Boys believes that its first-quarter results were below expectations due to a variety of factors occurring in the ordinary course of business,” said the firm in a statement.
Pep Boys reported a fourth-quarter loss of more than $4 million on roughly 5 percent year-over-year sales growth to $505 million. That represented the Philadelphia-based company’s first quarterly loss since the fourth quarter of 2009, a time when the U.S. economy was in recession and the auto industry was on the verge of collapse.
Pep Boys, the nation’s leading automotive aftermarket service and retail chain, was valued at $1 billion in the buyout, which represented a near 25 percent premium at the time. The move to buy Pep Boys and its Manny, Moe, and Jack brand, which has been around for more than 90 years, signaled a bet by the Gores Group on the auto industry and specifically Pep Boys’ tires, parts, and auto-repair specialty.
The company was reported to have hired investment bankers to explore a sale in early 2011, following years of speculation that it would look for a buyer. Even with a 45 day “go-shop" period, analysts did not see any competing offers for the auto parts and services seller.
“We do not expect another leverage buyout firm to counter-offer Gores Group and thus believe that the $15/share bid will be final,” wrote Cabrera Capital Markets analyst Cid Wilson at the time of the deal announcement.
Founded in 1921 by the “Pep Boys” — Emanuel “Manny” Rosenfeld, Maurice “Moe” Strauss, Moe Radavitz, and Graham “Jack” Jackson — the company has more than 700 auto-repair and parts stores in 35 states and Puerto Rico. The company competes against O’Reilly Automotive Stores, Advanced Auto Parts, and Autozone, among others in the automotive aftermarket.