Pep Boys says its merger is at risk

A planned $1 billion merger between Pep Boys — Manny, Moe & Jack and Los Angeles-based Gores Group appeared to be in trouble Tuesday as the auto-parts and car-repair chain disclosed that its suitor was troubled by lackluster financial results, wanted time to investigate the "downturn," and might pursue ending the deal, according to filings with regulators.

Philadelphia-based Pep Boys' shares fell more than 22 percent, to $11.62 a share, on news that Gores was concerned about "serious deterioration" in the retailer's business and had asked that the company put off issuing a proxy statement for its May 30 annual meeting of shareholders in Center City. In January, Gores had agreed to buy Pep Boys for $15 a share, pending shareholder approval.

In late April, Gores asked executives at Pep Boys to delay sending a proxy to shareholders, but the executives did not agree to that request. The private-equity firm said it wanted time to investigate why first-quarter results were below expectations and whether Pep Boys had "experienced a material adverse effect" or violated covenants of the merger agreement, according to Pep Boys.

In preliminary data released Tuesday, the retailer, which has its headquarters on Allegheny Avenue, said operating income for the quarter that ended April 28 was expected to be $7 million to $9 million on sales of $524 million to $526 million. The same period a year earlier, operating income was $26.3 million on sales of $513.5 million.

Pep Boys said that its results were below expectations "due to a variety of factors occurring in the ordinary course of business," and that details would be disclosed in future financial filings. But management forecasts in January were "prepared in good faith," the company said, and it does not believe any "material breach of its covenants under the merger agreement has occurred."

In pushing back against Gores, Pep Boys went ahead Tuesday with issuing its proxy, an annual document sent by publicly traded companies to shareholders in advance of investor meetings in which votes are cast on such issues as executive compensation, terms of board members, and proposed mergers.

Pep Boys said that it had offered to extend the time period for closing the deal, but that Gores had rejected the overture. According to the filings, Gores believed that the proxy statement was no longer accurate, and that it was "reserving all of its legal rights."

The investment firm said it would continue to probe the root causes of Pep Boys' financial performance and would decide after that whether there was cause to "be relieved from its obligation to consummate the merger," Pep Boys said in filings with regulators.

The costs to both sides of breaking the proposed merger agreement are potentially high: Pep Boys would face a $25 million penalty if certain terms were not met, while Gores would face a termination fee of $50 million if certain terms were not met.

The Gores offer on the table equals about $790 million in cash and more than $200 million in Pep Boys debt.

Pep Boys has been in business for 92 years and employs 19,000 people at 730 locations nationwide, plus several distribution centers and its headquarters near Henry Avenue.

Contact staff writer Maria Panaritis at 215-854-2431 or mpanaritis@phillynews.com or on Twitter @panaritism.