Pep Boys shares tumble after Gores calls off buyout

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(Global Markets) - Shares of Pep Boys-Manny, Moe & Jack (PBY.N) fell as much as 25 percent on Wednesday, after private equity firm Gores Group walked away from a $791 million deal to buy the auto parts retailer.

Gores had offered $15 per share for Pep Boys, which also provides auto-repair services, in January in a deal that gave the company an enterprise value of $1 billion.

But earlier this month, it sought to delay the completion of the deal, citing serious deterioration in Pep Boys' business and a breach of covenant under the merger agreement.

Both the parties then tried to negotiate a settlement, a source familiar with the matter told Global Markets.

Gores and Pep Boys, however, never discussed a repriced deal but talked about litigation, the source said requesting anonymity.

They eventually reached a settlement under which Gores agreed to pay Pep Boys a break-up fee of $50 million and merger-related expenses.

Pep Boys intends to operate as a standalone public company and is not actively looking to sell, the source said.

The company has tried to sell itself several times in the past without any success. More recently, it considered a sale after being approached by interested parties, public filings show.

"The real issue was not whether the deal will be terminated, but whether Gores was going to pay $50 million without litigation," said Roy Behner, co-chief investment officer at Westchester Capital Management, which holds shares of Pep Boys.

The auto-repair services industry has been doing badly in recent months as a mild winter led to less wear and tear on vehicles, and thus fewer repairs. Customers have also been deferring purchases in a weak economy.

Pep Boys and peers Advance Auto Parts Inc (AAP.N) and Monro Muffler (MNRO.O) have either reported or forecast weak results.

Pep Boys was founded in 1921 by four friends who pooled together $800 to open a single auto parts store in Philadelphia. It now offers automotive service, tires, parts and accessories and has over 7,000 services centers in the United States and Puerto Rico.

The company's stock has fallen almost 25 percent since Gores warned about cancelling the merger agreement on May 1, a sign that investors did not expect the deal to close.

Tassos Recachinas, president of Sophis Investments LLC, an investment advisory firm and a Pep Boys shareholder, said the stock has the potential to reach $30-$40 over a five-year period.

"We did not want the Gores transaction to close because we believed it substantially undervalued Pep Boys," Recachinas told Global Markets.

Pep Boys' shares fell to $8.31 on the New York Stock Exchange, a level not seen since August 2011. More than 1.4 million shares changed hands by 1520 ET, nearly 10 times their average daily volume.

(Reporting by A. Ananthalakshmi in Bangalore; Editing by Saumyadeb Chakrabarty and Sriraj Kalluvila)