Pep Boys Preliminary Results Might Put Proposed Merger in Jeopardy

announced today preliminary results for Q1 2012 ending on April 28. Worse than expected results sent the stock price plummeting 20% in pre-market hours to around $11.70 per share. According to the preliminary statement, Sales are expected to be between $524 and $526 million as compared to $513 million a year ago. That may appear positive, but when compared to operating income, it looks less favorable as expectations are between $7 and $9 million compared to $23.6 million a year ago. Net Income, which last year Q1 was 12.4 million, is expected to be between $0 and $2 million this year and earnings per share are expected to drop from $0.23 per share a year ago to between $0 and $0.04 during Q1. Pep Boys believe that their preliminary results are lower than expected due to a variety of factors occurring during the normal business cycle. The company said that it is working on implementing tactics and strategies to improve bottom line results. A proposed merger between Pep Boys and private equity company Gores Group L.L.C is now in jeopardy. Parental company Gores requested that Pep Boys delay its proxy statement by 30 days, as it considers that the projections included are no longer accurate and that Pep Boys may have violated covenants contained in the merger agreement. In response, Pep Boys says they have fully complied with all parental conditions for the merger and is counter offering to extend the period of time required for the final merger to occur. The Gores Group has said that regardless on whether or not Pep Boys delays its proxy statement filling, it will continue reviewing the Pep Boys situation to get to the root causes of the downturn and leverage its options in relation to the merger's future. Pep Boys maintains that Gores Group concerns and allegations to question the proposed merger are unjustified because according to them, all is down to factors related to the normal cycle of operations such as the mild winter whether, which has a negative impact in auto parts' sales and this should have been known by Gores Group before the deal was signed. In the other hand, Gores argument that the reasons for the drop in stock price are others different than normal operations and may be thinking on walking away from the deal arguing a Material Adverse Change or MAC, which is no other than a escaping route built into takeover agreements that allows the purchasing company to terminate the proposed deal if it can prove that the company being bought has experienced a previously undisclosed weakness in its operations.