Why Carl Icahn wants to pay $1 billion for Pep Boys

Manny, Moe and Jack never had it so good. Those are the faces of the auto parts and service company Pep Boys, which has been the target of a bidding war between investor Carl Icahn and Japanese tire maker Bridgestone. On Monday, Icahn upped the ante, offering roughly $1 billion for the business.

The auto parts and service industry has benefited from an increasingly aging U.S. vehicle fleet. The average car and light truck on the road right is a record 11.5 years old, according to IHS auto analyst Mike Wall.

Cars are better made, and people have held onto them longer in a shaky economy, he said. By 2020, Wall predicts 76 million vehicles will be at least 16 years old.

“Those vehicles out there are going to need repairs,” he said. “You’re going to see a lot of the do-it-yourselfers still out there repairing their vehicles and, of course, the service shops remaining busy.”

Pep Boys benefits from both. It sells parts and service in more than 800 stores around the country. Meanwhile, the improving job market and low gas prices have also been a boon to the business. People are commuting more and putting more wear and tear on their cars. They’ve also got extra money to spend.

“People are putting a little more money into maintenance that had been deferred,” said analyst Brian Sponheimer with Gabelli & Company.

But Pep Boys’ two suitors want different things from the company. Bridgestone has its eye on the service side of the business, hoping to expand the 2,200 tire and repair centers it already operates, mostly under the Firestone brand, Jefferies analyst Bret Jordan said.

“As cars have become more complicated, the growth in ‘do-it-for-me’ service is certainly there and driving fairly attractive valuations,” said Jordan.  

Meanwhile, it’s the retail side Carl Icahn is after, Jordan said, to combine with the Auto Plus parts chain he bought earlier this year.