Carl Icahn is selling Pep Boys but keeping the keys to the real estate.
Mavis Tire Express Services, based in White Plains, New York, has struck a deal to acquire Pep Boys, a provider of automotive services at nearly 800 locations nationally, for roughly $700 million in cash from Icahn Enterprises. The transaction is expected to close in the coming months, the companies said Tuesday.
Mavis, one of North America's largest independent tire and vehicle service providers, said the purchase will allow it to rapidly expand its footprint of retail locations, especially in the Western United States where Pep Boys has a strong presence.
Mavis' network of owned and franchised service centers across the United States and Canada will rise to 4,400 from 3,600. But Mavis won't own the real estate that Pep Boys occupies.
As part of the sale, billionaire investor Icahn, whose Icahn Enterprises acquired Pep Boys for roughly $1 billion in 2016, will retain ownership of Pep Boys' brick-and-mortar locations as well as AAMCO Transmissions and Precision Tune Auto Care businesses.
Icahn Enterprises had previously transferred the real estate to itself from Pep Boys. That's all a signal of where Icahn thinks the long-term value is in Pep Boys, according to BJ Feller, a Northmarq managing director in Chicago. The real estate — not the Pep Boys brand — is where the value lies, she said.
"This is just like a classic real estate separation strategy where they get to hold onto the real estate, they get the leaseback with combined entities between Mavis and Pep Boys," Feller told CoStar News. "And they kind of created a credit upgrade from the perspective of a landlord. It's far, far better to have the strength of the size of the combined entities behind your real estate than it was with just Pep Boys itself."
She described the transaction as "the art of the reverse sale-leaseback."
Scale meets staying power
Pep Boys, based in Bala Cynwyd, Pennsylvania, is a big player in the automotive aftermarket and offers services such as tire installation and sales, repairs, oil changes and maintenance services from nearly 800 locations nationwide.
Similarly, Mavis provides automotive care through Mavis Discount Tire, Mavis Tires & Brakes, Midas, Express Oil Change & Tire Engineers, Brakes Plus, Tire Kingdom, NTB (National Tire & Battery), Town Fair Tire and Tuffy.
“We believe that the combined businesses will benefit greatly from the inevitable economies of scale and from the great experience of the Mavis team in this industry," Icahn, chairman of Icahn Enterprises, said in a statement.
The auto-service industry has had its challenges, but it is ultimately resilient and strong, according to Feller.
"The fundamentals of it are really immune from anything online, even with [electric vehicles] growing market share," she said. "You can service EV. You can change tires. There is a really strong fundamental story here."
Why the real estate matters
And the sector's real estate is solid, according to Feller.
"Auto service real estate is one of the most structurally durable categories in net lease," she posted on LinkedIn. "The sites are typically freestanding, high-visibility, corner or near-corner locations on heavily trafficked corridors. The use is difficult to replicate — automotive service bays, lifts and the regulatory approvals that come with them create real barriers to new competition. And the underlying demand driver — Americans owning and driving cars — is about as recession-resistant as any consumer behavior in the economy."
The Pep Boys acquisition will not only expand Mavis' presence across the United States but also will contribute "a distribution network that will meaningfully enhance our supply chain nationwide," David Sorbaro, Mavis co-CEO, said in a statement.
Mavis and Icahn Enterprises didn't respond to CoStar News' requests for additional comment.
Mavis has been on a bit of an expansion spree. Last year it acquired Midas from TBC Corp., adding nearly 1,300 franchised locations to its portfolio.
Pep Boys — formally known as Pep Boys-Manny, Moe & Jack Holding — was founded in 1921 by three Navy veterans with those names.
For the record
Covington & Burling and Bullard Law Group are serving as legal counsel, Jefferies is serving as exclusive financial adviser and C Street Advisory Group is serving as strategic communications adviser to Mavis. Brown Rudnick is serving as legal counsel to Icahn Enterprises.