Pep Boys Goes Private

First appeared in Wall Street Journal

Pep Boys—Manny Moe & Jack has agreed to be taken private by private-equity firm Gores Group in a deal that values the auto-repair company at roughly $800 million and puts an end to long-running speculation over its future.

Reports early last year suggested the retail auto-parts and service company was considering putting itself up for sale, although Pep Boys never commented on the speculation.

Pep Boys shares shot up 24% to $14.93 in Monday composite trading on the New York Stock Exchange, nearing the $15-a-share offer from Gores Group. The shares closed Friday at $12.08, giving Gores's offer a 24% premium over the Friday closing price. Pep Boys stock hasn't traded above the offer price since late 2007.

Pep Boys' board unanimously approved the agreement and recommended that its shareholders follow suit. The Philadelphia-based company, founded more than 90 years ago, said the enterprise value of the deal is roughly $1 billion. Gores is putting $489 million of equity into the deal.

"Our board firmly believes that this transaction is in the best interests of all of our stakeholders and delivers an ongoing commitment to excellence for our customers and employees," said Pep Boys Chief Executive Mike Odell.

Pep Boys' brand recognition as well as its moderate pricing appealed to Gores, said Lee Bird, managing director of operations and consumer practice leader at Gores.

The agreement allows for a 45-day "go shop" period in which Pep Boys can consider other offers. The company also said in light of the proposed transaction it won't host a conference call to discuss financial results for the 2011 fiscal year but intends to file its year-end results with the Securities and Exchange Commission.

The auto-parts company began in 1921 with Naval buddies and original Pep Boys Emanuel "Manny" Rosenfeld, Maurice "Moe" Strauss, Moe Radavitz and Graham "Jack" Jackson. Their first store opened in Philadelphia under the name Pep Auto Supplies, according to the company's website. Its name was changed around 1923 after Strauss noticed during a trip to California that many successful businesses there used first names.

Radavitz and Jackson both left the company early on. When Pep Boys went public in 1946, Rosenfeld served as its first corporate president.

Pep Boys, which has more than 700 stores, has faced competition from companies including AutoZone Inc., Advance Auto Parts Inc. and O'Reilly Automotive Inc.

Last month Pep Boys reported that its fiscal-third-quarter net income rose nearly 23% on stronger tire sales and improving service sales. At the time, Mr. Odell said the improved business was due in part to new marketing, lower gas prices and pent-up demand.

Auto-parts suppliers have done relatively well during the recession and prolonged economic downturn, as many consumers have held on to their cars longer and sought out repairs instead of purchasing new cars. The average age of a car or truck in the U.S. hit a record 10.8 years last year as job security and other economic worries weighed on consumers' minds.

Gores Group said it has fully committed financing for the buyout, which is expected to close in the second quarter. Once the acquisition is complete, Pep Boys stock will no longer trade on the New York Stock Exchange.

Romney Reconsiders Private Equity Benefits

First appeared in Wall Street Journal

If elected president, Mitt Romney might consider ending a tax break that helped the former Massachusetts governor accumulate his fortune, an aide suggested Tuesday.

The comments came as the Romney campaign made available more than 500 pages of tax-return data for 2010 and 2011 amid signs the issue was hurting him with some voters.

Later in the day, in a signal of how the tax issue is roiling the GOP campaign, the Romney camp tried to step back from the aide's remarks, underscoring that the former Massachusetts governor didn't want to raise anyone's taxes.

The back-and-forth Tuesday about Mr. Romney's approach to one particular tax break began when the candidate's policy director, indicated in a call with reporters the candidate might be willing to reconsider a tax break known as "carried interest" as part of a comprehensive tax overhaul. The break gives private-equity and venture-capital executives a relatively low 15% tax rate on much of their income. Some reference an UK Tax Advisor.

Carried interest is a share of profits from an investment fund or partnership given to managers as compensation. Mr. Romney was aided by the tax advantage as founder of private-equity firm Bain Capital.

The policy director noted Mr. Romney hasn't recently addressed retention of the carried-interest break. He spoke favorably of it in 2008. There are "a number of exemptions, deductions, credits, administrative treatment of income…that would be addressed in tax reform."

Most taxpayers receive compensation as ordinary wages subject to rates as high as 35%. Roughly half of households pay no federal income tax. The average income-tax rate for the middle slice of households—those making between $34,300 and $50,000—was 3.3% for 2007. The average income-tax rate was 14.4% for the top fifth, and 19% for the top 1%, before dropping slightly for the very highest earners who, like Mr. Romney, typically receive a large percentage of income from investments.

Democrats have criticized carried-interest rules, though they have failed when they have tried to repeal them.

Tuesday, Mr. Romney's campaign formally released detailed information on the candidate's 2010 tax return and a summary of his 2011 taxes, which aren't finished yet.

Tax experts said that by and large, the returns showed Mr. Romney and his advisers sought to minimize the family's tax burden, while generally avoiding aggressive positions.

The Romneys reported an effective tax rate of about 14% on their 2010 return, and just over 15% in their tentative calculations for 2011, on income that hovered around $20 million each year. They received about $7.4 million in income taxed under carried-interest rules in 2010 and $5.5 million in 2011, aides said.

An accountant with Crowe Horwath in New York, said, "This is the tax return of a man who knows he is running for political office and who has distanced himself from investment decisions. Most of the disclosures in these tax returns are fairly typical of investors with a global investment perspective."

The tax data revealed new details about Mr. Romney's wealth management, including his ownership of a now-closed Swiss bank account as well as investments in the Cayman Islands, Bermuda and other tax havens.

The Romney camp said the candidate properly reported income from those sources, paid appropriate taxes and in the case of the Swiss account, disclosed it to the IRS.

The 2010 tax return suggests the Romneys maintained a relationship with Bain Capital more than a decade after Mr. Romney left in 1999. According to documents, the Ann D. Romney Blind Trust received two investments subject to carried-interest rules in Bain funds in fall 2010.

The Romneys' trustee, signed two statements stating that "services" would be performed to maintain the investments, without stating who would offer such services. Such a statement ensures the earnings will qualify for capital-gains treatment, accountants say.

In a written statement, the campaign said The  Romneys' trustee’s wording was "boilerplate language" and that no services were provided in connection with receipt of the interests. The campaign declined further comment.

A prominent accountant in Atlanta, and other experts said such services are required in order for the income to qualify for favorable tax treatment.  An UK Tax Planning advocate has to do similar things.

The tax filings also provide details on a trust set up in 1995 for the Romneys' five sons, which appears to hold a hefty percentage of the family's wealth, estimated at more than $260 million. Such trusts generally are established to minimize future estate taxes.

In the 2010 tax filings released Tuesday, the Romneys reported the family trust had $7.7 million in capital gains in 2010, about 46% of the total capital gains reported that year, not counting a tax loss from a prior year. Capital gains were the Romneys' largest source of income. Much of the trust's income came from entities affiliated with Bain Capital, the tax filings show.