Pep Boys, the auto parts and service chain with over 720 stores across the U.S., has announced it will terminate a proposed merger with Los Angeles-based private-equity firm Gores Group. Had it gone ahead, the deal would have been worth almost $800 million.
The merger came to an end after Gores had agreed to pay $15 a share in Pep Boys, amounting to $793 million. Yet after Pep Boys disclosed underwhelming first-quarter sales and net income on May 1, Gores got cold feet. The firm asked Pep Boys to postpone a shareholder vote set for May 30 to examine the results for a possible “material adverse effect” that could void the deal; Pep Boys refused that request.
Under the terms of the merger agreement, Gores has now paid Pep Boys a settlement of $50 million “for any and all potential claims that Pep Boys could assert under the terms of the merger agreement,” and to reimburse the auto parts giant for a number of merger-related expenses. Had Pep Boys accepted a better offer, it would have had to pay Gores $25 million.
Some shareholders had already shared concern before Tuesday’s ‘merger off’ announcement that the Pep Boys board would preemptively adjourn the special meeting. This led to Sophis Investments L.L.C. sending a May 29 letter to the Pep Boys board, warning that any adjournment of the meeting would “diverge from shareholder interests.”
Shares of Pep Boys closed at $11.09 Tuesday, up 2 cents, yet plummeted by more than 12 percent in after-hours trading.
Pep Boys president and CEO Mike Odell announced in a statement on Tuesday:
“Our financial position is solid. Our current intention is to use our cash on hand and the settlement proceeds to pay down our term loan this year and then to refinance our senior subordinated notes in 2013, both in advance of their respective 2013 and 2014 maturities.”