Gores Group May Slam Brakes On $1B Pep Boys Buyout

NEW YORK (TheStreet) -- Private equity firm The Gores Group may hit the brakes on its $15 a share buyout of Pep Boys(PBY) , as the auto parts and repair giant slipped to a loss in the fourth quarter of 2011, and reported weaker-than-forecast preliminary first quarter earnings on Tuesday.

In a regulatory filing released on Tuesday morning, Gores Group raised questions as to whether the "serious deterioration in Pep Boys business" since the company announced a late January buyout could precipitate a material adverse event, which would allow the buyer to cancel the deal. The notice sent Pep Boys shares sharply lower -- down close to 25% -- and at under $12, below the pre-buyout share price.

Gores Group said that it notified Pep Boys management on April 26 that it may try to cancel the buyout if a review of the company's finances shows that diminished sales and profitability counted as a violation of their January merger agreement.

"In light of this downturn, the projections provided to the board are no longer accurate, and Pep Boys may have experienced a material adverse effect or may have violated covenants contained in the Merger Agreement," Gores Group stated in the filing.

The Los Angeles-based private equity firm said they notified Pep Boys of their concerns on April 26 and will delay a special shareholder meeting to vote on the merger by 30 days to review the company's finances.

On Tuesday, Pep Boys said that it forecast revenue for the first quarter to be as much as $526 million, leading to a possible profit of between zero to $2 million -- earnings below management's forecast and an $8 million profit at this time last year. "Pep Boys believes that its first quarter results were below expectations due to a variety of factors occurring in the ordinary course of business," said the firm in a statement.