Why do you think that AZO has cutback on share repurchases and invested more in their stores in recent months?
Since auto parts stores only need an infusion of cash and upgrades to their appearance every 5 years, why not upgrade the stores now? That way, each dollar that is spent by AZO is financed 30% by ESL (since they own 30% of the company) and 70% by other shareholders.
Once $30,000 is plugged into the older stores for upgrades, then you begin buying back shares again. Thus, you will see in mid-2006, AZO will aggressively buyback 5 million shares, leaving 70 million outstanding. ESL will own 31% of the company. They will do this and push the stock price up to $100-$105.
Then SHLD will buy AZO at $115. The strategic reason for the merger is somewhat unclear, but Lampert wants build his empire. He will want to do this late in the year, so AZO will close on its high and ESL can collect its bonus.
$115 is a logical price given 70 million shares outstanding. It values AZO at roughly $8 billion. Since AZO can generate $600 million in Free Cash Flow, it will be accretive to SHLD's bottom line at that price.
SHLD will finance the deal as follows:
$2.5B of the stock they already own in AZO $3B in cash paid by SHLD to buy a portion of AZO $2.5B of SHLD stock to be issued at a ratio of .8 SHLD shares for every AZO share (this will value SHLD shares at $143.75 which is close to where it will be trading at the time).
Lampert will just have to convince 20% of shareholders in AZO to sell out at $115. He can rationalize this by saying "hey, the stock has never traded that high, so I am giving you a good deal."
Even though AZO would still be undervalued at $115, he will be able to get the weakest hands to sell him their shares.
I have looked into my crystal ball and seen the future. Eddie, if you are reading, what do you think?
The problem is Sears is a retailer and AZO is an auto parts store. There would be no purpose to create a comglomerate. Kmart buying Sears made sense. The only thing AZO would benefit from is the craftsman tool name. But they can do that anyway without the merger.
I think your timing of the deal is good and holding off on the buy back is correct, but two things I think also will play a factor:
1) AZO has $150m in debt due in 2006, he will wait til this is paid off b/c he will not want to use sears money to pay this
2) I think the buy back has slowed down at AZO and will ramp up at sears in the next quarter (see new buy back plan in SHLD 10-Q) b/c he will want to use Sears stock to buy AZO and not have to touch his cash position. b/c he already has a nice stake in both he will benefit and then buy out the "weak-hands" with a new and improved buyback plan