O'Reilly Auto Parts 2008 Annual Report Download - page 49

O’REILLY AUTOMOTIVE 2008 ANNUAL REPORT PG.47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 – BUSINESS COMBINATION
On July 11, 2008, the Company completed the acquisition of CSK, one of the largest specialty retailers of auto parts and accessories in the
Western United States and one of the largest such retailers in the United States, based on store count. Pursuant to the merger agreement, each
share of CSK common stock outstanding immediately prior to the merger was canceled and converted into the right to receive 0.4285 of a share
of O’Reilly common stock and $1.00 in cash. To fund the transaction, the Company entered into a credit agreement for a $1.2 billion asset-
based revolving credit facility arranged by Bank of America, N.A., which the Company used to renance debt, fund the cash portion of the
acquisition, pay for other transaction-related expenses and provide liquidity for the combined Company going forward. e results of CSK’s
operations have been included in the Company’s consolidated nancial statements since the acquisition date.
At the date of the acquisition, CSK had 1,342 stores in 22 states, operating under four brand names: Checker Auto Parts, Schuck’s Auto Supply,
Kragen Auto Parts and Murray’s Discount Auto Parts. is acquisition allowed the Company to enter into twelve new states: Alaska, Arizona,
California, Colorado, Hawaii, Idaho, Michigan, Nevada, New Mexico, Oregon, Utah and Washington, and a number of new markets. As of
December 31, 2008, the Company had converted 51 CSK stores to O’Reilly brands, merged 35 CSK stores with existing O’Reilly locations,
closed six CSK stores and opened four new CSK stores.
PURCHASE PRICE ALLOCATION
e preliminary purchase price of CSK’s acquired operations as of the date of acquisition was comprised of:
(In thousands)
O’Reilly stock exchanged for CSK shares $ 459,308
Cash payment to CSK shareholders 42,253
CSK shares purchased by O’Reilly prior to merger 21,724
Fair value of options and unvested restricted stock exchanged 7,736
Direct costs of the acquisition 10,973
Total purchase price $ 541,994
e acquisition was accounted for under the purchase method of accounting with O’Reilly Automotive, Inc. as the acquiring entity in
accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”). Accordingly, the consideration paid by the Company to complete
the acquisition has been allocated preliminarily to the assets acquired and liabilities assumed based upon their estimated fair values as of the
date of the acquisition. e allocation of purchase price is based upon certain external valuations and other analyses, including the review
of legal reserves for legacy governmental investigations being conducted against CSK and its former ocers as discussed further in Note 14,
that have not been nalized as of the date of this ling. Accordingly, the purchase price allocations are preliminary and are subject to future
adjustments during the maximum one-year allocation period as dened in SFAS No. 141. e Company has adjusted its initial acquisition
cost and purchase price allocation to reect adjustments to the fair values of common stock issued, as discussed further below, certain assets,
reserves associated with plans to involuntarily terminate certain team members of CSK, estimated legal reserves and store closure reserves.
O’Reilly exchanged 18,104,371 shares of common stock pursuant to the formula prescribed in the merger agreement and as described above. In
accordance with Emerging Issues Task Force (“EITF”) 99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities
Issued in a Purchase Business Combination, the value of the O’Reilly stock exchanged for CSK shares of $25.37 per share was determined based
on the average close price of O’Reilly stock beginning two days before and ending two days aer June 9, 2008. e June 9, 2008, measurement
date reects the last day when the number of O’Reilly shares issuable in the transaction became xed such that subsequent applications of the
formula in the merger agreement did not result in a change in the total number of shares exchanged. e fair value of options exchanged in the
merger of $6.7 million was based on CSK’s 3.69 million outstanding options on July 11, 2008, multiplied by the exchange ratio adjusted to reect
the $1.00 per share cash consideration. e weighted-average fair value per option of $3.82 was determined using a Black-Scholes valuation
model with the following weighted-average assumptions:
Risk free interest rate 2.5%
Expected life 2.3 Years
Expected volatility 29.9%
Expected dividend yield 0%