Deal’s End Will Allow Scheib To Repaint Its Plans for Future

CORPORATE FOCUS

By ANTHONY PALAZZO

Staff Reporter

When a planned buyout falls apart, it’s not uncommon for share price of the target company to skid.

That’s what happened on Sept. 1, when Earl Scheib Inc. said its plan to sell out to a private real estate investment firm, Elden Holding Group LLC, had been terminated.

That day, Scheib’s lightly traded stock fell by 11.4 percent, to $2.80 a share from $3.16 the day before.

Last week, Scheib shares were still trading at $2.80 each, giving the company a market value of around $12.3 million far below the $15 million, plus $2 million in transaction costs, that Elden was going to pay.

But officials of the Sherman Oaks-based auto paint chain weren’t sounding like the jilted ones.

Vice President and General Counsel David Sunkin pointed out that it was Scheib’s board that terminated the letter of intent, in place since May.

Elden apparently dragged out the due diligence. Scheib had granted an extension of the deal’s contingency period from its original deadline of Aug. 3, and even after the second deadline passed on Aug. 21, the company waited another 10 days before finally deciding enough was enough.

“The buyer’s timetable didn’t jibe with what the board felt were the shareholders’ interests at large,” Sunkin said.

It’s not clear why Elden’s bid stalled.

In May, Elden Managing Partner Cary Lefton acknowledged that the purchase was partly motivated by the property values underlying the 43 stores that Scheib owns, out of 113 locations.

At the time, though, Lefton said there were no immediate plans to close stores. “We see an upside in developing the brand name potential so it has more value,” he said then.

Elden, which is the landlord on Scheib’s headquarters building under a long-term lease, was familiar with Scheib’s operations, Sunkin said.

Nevertheless, it would have been a new business for Elden to run, even if the eventual plan was to sell or close down the chain while keeping the property.

Lefton did not return calls last week.

Sometimes, due diligence exercises hit snags when a review of the books or operations turns up something unexpected. However, this didn’t appear to be the case in the Scheib deal. According to merger documents filed by Scheib with the Securities and Exchange Commission, any significant problems revealed through the due diligence process would have triggered a reimbursement of Elden’s expenses if the deal were terminated. No such expenses were triggered.

Instead, it appears that Scheib officials are slightly relieved to be out from under the restrictions that the letter of intent imposed since May.

Specifically, termination of the deal with Elden allows Scheib to solicit other potential bidders. It also allows the company to continue with a long-term restructuring that only recently has begun to bear fruit.

“The board feels that the company has improved steadily over the past year and then some, and so they felt like (because) they couldn’t agree to satisfactory terms in the merger agreement and the timing that it made more sense to terminate the letter of intent,” Sunkin said.

Under the letter of intent, Scheib wasn’t allowed to sell or close locations that were not part of a previous three-year restructuring plan, Sunkin said. Now, he said, “the board can take a top-to-bottom review of the strategies they want to implement.”

Sooner or later, there will probably be another attempt to sell the company. In the press release announcing the deal’s termination, Chief Executive Christian Bement held out a virtual welcome mat for other interested buyers, saying the company is “committed to strategies designed to maximize shareholder value.”

Bement also noted that a recent trend of same-store sales increases had continued through the fiscal first quarter ended July 31. (Scheib was to report its first quarter results late last week.)

Though the company’s operations have been improving, it struggles with the high overhead costs inherent in recent Sarbanes-Oxley requirements.

“The fact remains that the company’s stores are profitable and viable entities whose profits have had to be allocated to meet the substantial and rising costs of being public,” said Andrew Shapiro, president of Lawndale Capital Management LLC of Mill Valley, which owns more than 12 percent of Scheib’s stock. “The chain needs more stores open, and this would be a great fit for a company with strength and experience in franchising.”