That’s the hard advice to Pep Boys shareholders from Anthony Cristello of BB&T Capital Markets, who sees the $15 per share offer from investment firm Gores Group as the best available option.
Cristello said Pep Boys, which earlier this week agreed to be bought out in a $1 billion deal, has few legitimate suitors on the horizon despite having been (quietly) on the market for some time.
“We advise investors to take profits,” Cristello said in his look at the deal. “While the valuation appears cheap, Pep Boys has been shopped many times over the past few years and never received a bid that the board believed to be adequate.”
Cristello said further, “Could anyone strategic come into play? We do 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 out of Chapter 11 in 2007.
“Still, we think that TBC currently has its hands full right now with its existing businesses and an acquisition of Pep Boys likely does not make sense. Considering the retailers such as an O’Reilly for example, it is not likely, in our view. The Pep Boys service business would have to be divested and in our opinion, Pep Boys 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).”
So what does coming off the bog board and going private mean to Pep Boys – and the rest of the tire and service market? According to Cristello, “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. Also the tire segment (now at 20% mix) is under pressure and we suspect that the recent acquisitions the company has made continue to pressure gross margins, which may have pressured earnings growth in 2012. Whether Pep Boys can ever achieve high-single-digit EBIT will remain to be seen, but it might not be seen in any public filings.”
