The Gores Group has terminated its agreement to acquire automotive service and retail chain Pep Boys, the company announced in a statement Thursday evening.
The firm will pay $50 million to Pep Boys for merger related expenses, Pep Boys said.
Gores Group had announced the $1 billion agreement to purchase the company in January. The firm would have acquired Pep Boys for $15 per share in cash, a 26 percent premium over yesterday’s closing price of $11.08. The deal had been expected to close in the second fiscal quarter of 2012, according to a statement.
However, the company’s fortunes have faded since then. Pep Boys stock was downgraded by TheStreet Ratings from buy to hold earlier this month after quarterly earnings fell from 70 cents per share over the same period the previous year to 54 cents.
The company included this statement from Gores in its SEC filing: “Pep Boys may have experienced a material adverse effect or may have violated covenants contained in the Merger Agreement. If Parent [investment funds affiliated with Gores Group] concludes that a material adverse affect or material breach of covenant has occurred and is successful in asserting these positions in a court of law, Parent would be relieved from its obligation to consummate the Merger.”
Material adverse effect clauses, also known as material adverse change (MAC) clauses, became popular among fund managers during the financial crisis from 2007 to 2009. The clauses allow firms to abandon deals at minimal cost if companies fall into dire straits following a merger or acquisition agreement.
Last year, Cerberus Capital Management and Chatham Lodging Trust invoked a similar clause to terminate a
Pep Boys may have experienced a material adverse effect.
Pep Boys SEC filing
Pep Boys stock tumbled after the announcement of the deal’s cancelation. Shares opened at $8.59, down 22.5 percent from where they had closed the night before.
A spokesman based in The Gores Group’s Los Angeles headquarters was unavailable at press time. Market analysts that cover Pep Boys could not be reached for comment.
Prior to this deal’s cancelation, The Gores Group had been extremely active. In April, the firm agreed to acquire TE Connectivity’s touchscreen supplier business Touch Solutions for $380 million cash just months after announcing deals for autoparts company The Hay Group, data center operator Alpheus Communications and logistical service provider The Clark Group.
The firm closed on a $2 billion flagship vehicle last year. The Gores Group typically invests in US or European companies that are underperforming or distressed. In addition to Los Angeles, the firm also maintains offices in Boulder, Colorado and London.