On May 20, the Wall Street Journal reported “Potential buyers are kicking the tires of Pep Boys -Manny Moe & Jack. Private-equity firm Golden Gate Capital and other suitors have recently expressed interest in buying the auto-parts and services retailer, according to people familiar with the matter.
“Pep Boys isn’t working with an investment bank on a sale and isn’t currently in negotiations with any of the parties, one of the people said. It isn’t clear whether the company wants to sell and a deal is far from certain.”
That day’s news was good for a 16% pop from $9.25 to $10.75.
Then on June 8, PBY delivered its first earnings beat in a while and the company outlook spurred analysts to raise estimates significantly, taking this year from $0.16 to $0.25 and next year from $0.23 to $0.33. Thus the boost in the Zacks Rank.
That surprise was worth 9% to shares the following day, June 9.
And last week, the company announced the appointment of Scott Sider as its new CEO. Mr Sider was also appointed to the Board of Directors. Mr Sider most recently served as Hertz Corporation’s Group President, Rent A Car Americas, their largest division.
This news didn’t bring any further surge in shares, but one look at the volume this month and you can see that big funds are definitely on the prowl, with the 10-day average exceeding 1 million shares vs. the 90-day average of under 500,000.
GAMCO On the Prowl
But some of the most interesting news this spring for PBY has been the jockeying by big funds to see who is going to out-bid or out-maneuver the other in an attempt to potentially take PBY private.
In the midst of all this has been one large investment fund quietly increasing its stake and not-so-quietly trying to take over the board of directors.
Mario Gabelli’s GAMCO Investors, which now holds about 10.17 million shares of Pep Boys representing almost 19% of the company, first announced in April that it was planning to nominate five candidates for the board of the auto parts and services retailer.
At the end of Q1, GAMCO held only a 12% stake.
And another big holder who had been selling recently suddenly had a change of heart in May. Glenhill Advisors, who reduced their stake from 7.8% to 7% in Q1, filed an original 13D in late May, shifting from a 13G, to effectively declare themselves (or obtain the right to be) activist investors.
In the 13D filing, Glenhill noted that in light of the recent GAMCO filing and press reports about potential acquirers, Glenhill may choose to engage in a dialogue with PBY or others concerning the best future plans for the Company.
But since this May filing action, Glenhill may have backed off. It looks like they sold about 400,000 shares in mid-June and went back to a 13G filing, effectively letting GAMCO have their way.
From the looks of the earnings momentum (despite the high forward multiple near 40X) and the price action (a “high-and-tight” bullish flag), I think this battle of titans should help keep a bid under shares. If you have any doubt, look at the volume bars for the past month as these heavies, and probably many others, accumulate shares.
Disclosure: I own PBY shares for the Zacks Follow The Money Trader.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.