Pep Boys -- Manny, Moe & Jack slumped the most in three years after would-be buyer Gores Group LLC asked the auto-parts chain to delay a shareholder vote on the deal after first-quarter results missed expectations.
On April 26, Gores asked to delay a special shareholders’ meeting by 30 days to allow it to determine the causes and extent of the “significant downturn,” Philadelphia-based Pep Boys said in a filing today. The vote is not being changed and will take place as scheduled on May 30 with proxy letters being mailed to shareholders tomorrow, Pep Boys said.
Pep Boys, which agreed to be bought in January for $15 a share, said first-quarter sales (PBY:US) were as much as $526 million and net income may reach $2 million. David Schick, an analyst for Stifel Nicolaus & Co. in Baltimore, estimated revenue of $557.4 million and net income of $13.8 million.
“The deal looks at risk, though not definitely, due to a recent -- sharply negative -- inflection in business,” Schick, who downgraded Pep Boys shares to hold from buy, wrote in a note to clients. “We suspect these are Pep Boy-specific issues as warm winter weather has helped recent auto-parts trends.”
Pep Boys, which has more than 730 locations in the U.S., slumped 22 percent to $11.62 at the close in New York for the biggest decline since Dec. 9, 2008.
Brian Zuckerman, general counsel for Pep Boys, declined to comment beyond the filings. Terry Fahn, a spokesman for Los Angeles-based Gores, also declined to comment.
Pep Boys said its results missed expectations because of what it called factors occurring in “the ordinary course of business.”
Material Adverse Effect
If the downturn was due to a “material adverse effect” or a “material breach of covenant” has occurred, Gores may decide not to consummate the deal, according to the filing.
Pep Boys countered by referring to language in the merger agreement that says a material adverse effect excludes any failure by the company to meet internal or analysts’ estimates.
If Gores pulls out of the deal, it will pay Pep Boys a termination fee of $50 million, according to regulatory filings. Pep Boys would owe Gores $25 million for ending the transaction.
At least one investor wasn’t scared off by Gores’s actions. Jean-Francois Comte, portfolio manager of an event-driven fund at Paris-based Lutetia Capital that includes shares of Pep Boys, is considering buying more after today’s plunge. Gores had cited “negative trends” in performance when it was negotiating the deal in January, Comte said.
“There is no way they can pretend that this wasn’t what was represented by management,” Comte said in a telephone interview. They will have a tough time getting out of the deal because “they already revised the offer because of recent performance,” he said.
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