PHILADELPHIA – At least three law firms – Brower Piven, Tripp Levy PLLC and the law offices of James C. Kelly – have announced investigations into the acquisition of Pep Boys by the Gores Group,
announced earlier this week. Both firms are investigating possible breaches of fiduciary duty to current Pep Boys shareholders and other violations of state law by the board of directors of Pep Boys relating to the proposed acquisition.
On Jan. 30, Pep Boys announced that it had entered into a definitive merger agreement providing for Gores Group to acquire Pep Boys for $1 billion. Under the terms of the merger agreement, Pep Boys shareholders will receive $15 for each share of Pep Boys common stock held. However, according to Yahoo! Finance, at least one analyst has set a high price target of $17 per share.
The firms seek to determine, among other things, whether the board breached its fiduciary duties by failing to maximize shareholder value.
However, in his most recent analyst's note, Tony Cristello of BB&T's Capital Markets is advising investors to "take the money and run."
"We are lowering our rating to Underweight (3) and would encourage investors to sell into the strength," Cristello wrote on Jan. 30. "The shares are up 23 percent today (vs. the S&P 500, down 0.86 percent) due to the announcement that The Gores Group is going to acquire the company for $15/sh ($1B in total transaction value). This transaction is roughly 6.4x our CY'11 EV/EBITDA estimate or 5.7x our CY'12 estimate.
"We advise investors to take profits," Cristello said. "While the valuation appears cheap, PBY has been shopped many times over the past few years and never received a bid that the board believed to be adequate. In fact, we think the Go-Shop period until March 14 is more a function (and formality) of how the transaction was formed — that is, privately with the two parties rather than a formal sell process."
Cristello also stated that BB&T does not foresee any strategic buyers that would be interested in Pep Boys, "although it's possible that an international buyer could have some interest similar to when Sumitomo acquired TBC in 2005 for purposes of distribution, or when Japan's Autobacs Seven acquired Strauss Auto (similar model to PBY) out of Chapter 11 in 2007," he said.
BB&T also believes Pep Boys' service business should be divested but that the company's "hub and spoke" service model is still a good one.
"The PBY service business would have to be divested and in our opinion, PBY simply does not have the compelling turnaround features in its retail operations to make it work (e.g., stores too big, not all stores in great locations)," Cristello wrote. "While the business model still has its inefficiencies, we believe the strategy to build a hub and spoke service model is the right one, albeit one that will take time. Management has cut many expenses, but the harder choices in terms of closing stores or divesting business and continuing its plans for aggressive consolidation are easier done under the cover that a private company provides."