Pep Boys avoids fight with biggest shareholder

June 11, 2015

The largest shareholder of Pep Boys – Manny, Moe & Jack has won a fight to add three members to the company’s board of directors following a months-long, back-and-forth contest between the two parties. The settlement avoids competing slates of board candidates at Pep Boys’ annual shareholder meeting in July.

GAMCO Asset Management Inc. holds 18.89% — or 10,172,922 shares — of Pep Boys stock. Since November GAMCO executives have expressed an interest in appointing members to the board “because we believe that the board could be improved by the addition of directors who have strong, relevant backgrounds and who are committed to fully exploring all opportunities to unlock shareholder value.”

In filings with the U.S. Securities and Exchange Commission (SEC) GAMCO points to Pep Boys’ stock performance compared to other benchmarks. Here’s the comparison, assuming a $100 investment in each of the four funds on Jan. 1, 2010:

  Jan. 2010 Jan. 2011 Jan. 2012 Jan. 2013 Jan. 2014 Jan. 2015
Pep Boys $100 169.33 147.85 134.76 146.14 103.18
S&P SmallCap 600 Index $100 130.07 141.61 164.30 208.71 221.55
Peer group $100 149.64 196.70 225.24 286.45 344.82
S&P 600 Automotive Retail Index $100 142.91 182.72 221.17 252.21 298.88

In the end, GAMCO and Pep Boys settled. But that came only after a protracted tennis match.

The settlement, announced June 11 in separate SEC filings by GAMCO and Pep Boys, adds three GAMCO nominees to the board of directors: Matthew Goldfarb, F. Jack Liebau Jr. and Bruce Lisman. Their names will be included along with these Pep Boys incumbents: Robert Hotz, James Mitarotonda, Robert Nardelli, Robert Rosenblatt, Jane Scaccetti, John Sweetwood and Andrea Weiss. Two current board members, Shan Atkins and Nick White, don’t plan to stand for re-election.

Also, upon election to the board, a GAMCO nominee will be appointed to the board’s audit, compensation and nominating, and governance committees. Pep Boys will mail new proxy cards to its shareholders in advance of the annual meeting.

In a press release Pep Boys’ Chairman of the Board Hotz said, “We are pleased to have reached this understanding with GAMCO, as we believe it is in the best interests of all Pep Boys shareholders to avoid the significant cost and distraction of a proxy contest.

“This is a time of significant opportunity at Pep Boys, and we are confident in our plans to grow the business and deliver a differentiated customer experience. We look forward to the insights and experience that the three new directors will bring to the board as we work together to enhance long-term value for all Pep Boys shareholders.”

Here’s the back story:

GAMCO is a wholly-owned subsidiary of GAMCO Investors Inc., which is led by Chairman and CEO Mario Gabelli. He’s been at the heart of trying to persuade Pep Boys to consider its members. In January, one day after GAMCO said it would nominate three candidates for the board, Gabelli and Hotz, chairman of the Pep Boys board spoke on the phone. Gabelli “expressed concerns about the format of the company’s stores and a desire for value creation for shareholders, including through consideration of sale leaseback transactions, dividends or the sale of the company.”

A week later the two met in person, and Gabelli “expressed concerns that the board was not sufficiently focused on the company’s service business” and that he thought “the board required meaningful reconstitution to best serve the interests of shareholders.”

On March 2, Pep Boys increased the size of its board from eight to nine members and appointed Robert Nardelli (the former Chairman and CEO of Chrysler LLC) as its newest member.

Discussions between the two parties continued. In April GAMCO told the company it would nominate five candidates. A week later Hotz said the company was open to adding one of GAMCO’s nominees to the board, and considering another as a candidate for election. Pep Boys then made another offer – it would increase the size of its board from nine to 11 members and include two GAMCO nominees on its ballot. Ultimately Hotz and Pep Boys countered again, with an offer to increase the size of the board to 11 members and include three GAMCO nominees as candidates. No current directors would leave the board.

So GAMCO officially filed its proxy contest and a slate of four candidates on June 8. Two days later the two parties finally reached an agreement, and GAMCO canceled its opposing ballot of board nominees.

Read more of MTD's coverage of Pep Boys:

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