O'Reilly Auto Parts seeks nationwide store coverage

Nearly a week after O’Reilly Automotive Inc. publicized its $352 million offer for CSK Auto Corp., the companies appeared to be deadlocked as other industry rivals reportedly circled the ailing Phoenix-based auto parts retailer.

On Feb. 7, CSK (NYSE: CAO) announced that O’Reilly would enter a standstill agreement six days after the publicly traded Springfield company (Nasdaq: ORLY) proposed the takeover bid to CSK’s shareholders.

By entering the agreement, O’Reilly has joined some 20 suitors granted access to nonpublic information about CSK as its board of directors ponders the company’s future, according to a news release.

“We are pleased that we have been able to reach an agreement with O’Reilly that will enable them to participate in our process,” CSK CEO Larry Mondry said in the release.

Calls to a public relations firm representing CSK Auto were not returned, and a New York-based spokeswoman for O’Reilly said company officials had declined Springfield Business Journal’s request for an interview.

But O’Reilly’s motives are clear. The company’s presence in the Midwest and Southeast, combined with CSK’s Western presence, would put the merged company in nearly every region of the country short of the Northeast.

O’Reilly has been courting CSK privately since March, and failed negotiations between executives prompted O’Reilly CEO Greg Henslee to appeal directly to CSK’s shareholders with the hostile bid. In a Feb. 1 letter to Mondry, Henslee said O’Reilly was willing to buy CSK’s 44 million outstanding shares of common stock for $8 a share – a 34 percent premium over CSK’s closing stock price Jan. 31.

Earlier in January, CSK’s stock had tumbled to less than $4 a share; stock was $17 a share when O’Reilly began pursuing CSK.

The proposed transaction is valued at more than $840 million, because O’Reilly would assume about $490 million in CSK debt.

The poison pill

O’Reilly’s quest to expand its auto parts empire hit a major snag when CSK adopted a shareholder rights plan designed to block the sale. The defensive strategy – also known as a “poison pill” – essentially prevents a single company or individual from acquiring more than 10 percent of CSK stock. O’Reilly already owns nearly 5 percent of its competitor’s stock, or about 2 million shares acquired through open-market trading.

CSK stock jumped to a six-week high of $9.19 a share the day O’Reilly’s offer was made public and traded as high as $9.70 on Feb. 4.

Two of CSK’s major shareholders – Blue Harbour Group LP and Karsch Capital Management LP – sold off a significant portion of their CSK stock holdings last week, according to Securities and Exchange Commission filings.

Connecticut-based Blue Harbour reduced its stake to 834,900 shares, or 1.9 percent, and New York-based Karsch Capital cut its ownership in CSK by a third to 3.6 percent, according to the filings.

Karsch Capital, which had been one of CSK’s largest investors, was pressuring the retailer to sell as far back as October 2006. Weeks earlier, two top CSK executives left the company after an internal investigation revealed accounting irregularities involving vendor allowances as well as inventory and accrual accounts.

In a letter to CSK at the time, Karsch Capital said selling the company was the “most viable way for the board to unlock significant shareholder value, and would help avert any further misfortune that CSK Auto and its shareholders may potentially endure as a stand-alone entity.”

Executive moves

Just days before O’Reilly went public with its offer, CSK announced a reorganization of its senior management team to “leverage existing skills and experience across the senior management team and to continue reducing general and administrative operating costs,” according to a company news release.

One of O’Reilly’s executives, Chief Financial Officer Tom McFall, was previously employed by CSK before joining O’Reilly in May 2006.

McFall was CFO for CSK’s Midwest operation, following the company’s December 2005 acquisition of Murray’s Discount Auto Stores in Belleville, Mich. McFall was with Murray’s for eight years as a key member of the executive team as CFO, vice president of finance and controller.

CSK, which has stores under the Murray’s Discount Auto Parts, Checker Auto Parts, Schuck’s Auto Supply and Kragen Auto Parts brands, is the country’s fourth-largest auto parts retailer. As of Jan. 6, CSK operated 1,349 stores in 22 states.

Memphis, Tenn.-based AutoZone Inc. is the largest auto parts retailer with 3,972 stores in 48 states plus the District of Columbia and Puerto Rico and 124 stores in Mexico as of Nov. 17. The No. 2 spot is held by Roanoke, Va.-based Advance Auto Parts Inc., which had 3,228 stores in 40 states, Puerto Rico and the Virgin Islands as of Oct. 6.

O’Reilly Auto Parts’ 1,830 stores as of Dec. 31 positions it as the third-largest. O’Reilly and CSK combined would be within 50 stores of No. 2 Advance Auto Parts.

Reuters reported Feb. 6 that analysts expect Advance Auto, which also lacks a Western presence, to bid on CSK. If Advance were to acquire CSK, the merged company would surpass AutoZone as the country’s largest auto parts retailer. [[In-content Ad]]