Icahn's bid for Pep Boys would boost aftermarket business, but not Federal-Mogul, experts say
DETROIT -- If financier Carl Icahn acquires Pep Boys for $863 million, it will give a big boost to his aftermarket retail chain Auto Plus, but not so much for another Icahn asset, Federal-Mogul Holdings Corp.
Together, Pep Boys and Auto Plus -- which have 800 stores and 278 locations respectively -- would comprise the fifth-largest retail auto parts chain in the United States, says Brian Sponheimer, a New York-based analyst for Gabelli Asset Management.
Icahn launched his consolidation strategy in June, when he purchased Auto Plus from Canada’s Uni-Select Inc. for $340 million. Auto Plus subsequently acquired a number of stores in Texas, Wisconsin and elsewhere.
Earlier this week, Icahn offered $15.50 per share for the Pep Boys-Manny Moe & Jack, outbidding a pending 15-per-share offer from tiremaker Bridgestone Corp., which has until 5 p.m. ET on Friday afternoon to make a higher bid. Pep Boys said Wednesday that it deemed Icahn's offer to be superior to the Bridgestone bid.
Even with Pep Boys’ stores, Auto Plus would be significantly smaller than rivals Advance Auto Parts Inc., Autozone Inc. and O’Reilly Automotive Inc., Sponheimer says. But it would have a concentration of stores in some regions, and that would allow it to compete.
“Being a retailer is really about store density within geographic locations,” Sponheimer said. “Being big isn’t a good thing if you are spread out and have higher freight costs.”
But what about Federal-Mogul, which has its own aftermarket strategy? Would Pep Boys provide a major new outlet for Federal-Mogul’s 20-plus aftermarket brands? Probably not, Sponheimer says.
That’s because the company’s Motorparts division already supplies Pep Boys and other big retail chains. The Pep Boys acquisition “is an interesting wrinkle, but it shouldn’t mean much for Federal Mogul at all,” Sponheimer said.
That’s not to say that Federal Mogul’s Motorparts division -- which generates roughly half of the company’s overall revenue -- has no expansion plans of its own. Since Federal-Mogul emerged from Chapter 11 bankruptcy proceedings in 2008, its Powertrain division, which produces pistons, engine bearings and other components, has struggled to make a profit.
So the company has taken steps to expand its aftermarket Motorparts division. After Daniel Ninivaggi was named CEO of Motorparts last year, he announced plans to add filters, belts, hoses and other components to his product lineup.
He also launched a service called “Garage Gurus,” which provides training and repair tips to service technicians. While it’s too early to judge its success, the initiative makes sense, says Bret Jordan, a Boston-based analyst for the brokerage firm Jefferies LLC.
That’s because newer vehicles -- with their arrays of sophisticated computer chips, sensors and components -- have gotten too complex for car owners who want to make their own repairs.
Only 5 percent of do-it-yourselfers are younger than 30 years old, Jordan said. “The average do-it-yourselfer is an older man, as opposed to a young millennial. You are seeing a long-term shift to professional service technicians.”
Indeed, the Auto Care Association has estimated that auto repairs by professional mechanics accounted for sales of $91 billion last year, nearly twice the $49 billion revenues generated by do-it-yourself segment.
So will Motorparts get its share of the expanding market for professional repairs? “It’s a little early in the process” to draw conclusions, Sponheimer said. Stay tuned.