Will Carl Icahn get Manny, Moe & Jacked by Pep Boys?

Billionaire investor Carl Icahn bested Japan's Bridgestone in the $1.03 billion battle for auto parts and repair chain Pep Boys-Manny, Moe and Jack (PBY), but winning the war for market supremacy against much larger rivals isn't going to be easy.

Icahn plans to merge Philadelphia-based Pep Boys, which has more than 800 locations, with Auto Plus, a smaller rival with 270 stores that his Icahn Enterprises (IEP) acquired in June. The combined company, however, would be dwarfed by competitors such as AutoZone (AZO) and Advanced Auto Parts (AAP), each of which have more than 5,000 locations, and O'Reilly Automotive (ORLY), which has more than 4,000.

Pep Boys also has had a rocky recent history, although its financial performance has improved lately. In the fiscal year ended Jan. 31, 2015, it posted a net loss of $18.85 million. Revenue was $2.08 billion, down from $2.09 billion in the 2013 period.

Private equity player Gores Group abandoned its plans to acquire the chain in 2012 after Pep Boys' financial performance deteriorated unexpectedly. The Wall Street Journal reported in May that other potential buyers "kicked the tires" at Pep Boys but apparently took a pass.

"Icahn is certainly paying up for something that I am not sure if he's going to get the full value out of at this point," said Anthony Cristello, a managing director at BB&T Capital Markets. He added that the chain isn't in good locations compared with its peers and its business model is out of date.

"The retail selling square footage (at Pep Boys) is much larger than what you would have at a typical O'Reilly, or an AutoZone or an Advanced by a few thousand square feet," he said. "So, their overhead and occupancy costs are higher."

His view is backed by Jefferies analyst Bret Jordan, who rates Pep Boys as a "hold" and said the retailer "has never been particularly high-functioning" in the 20 years he has covered it.

Both Cristello, who rates Pep Boys as "underweight" and whose firm expects to do investment banking with the chain, and Jordan figure that Icahn will divest the auto service business and focus on parts retailing. The activist investor also owns a 82 percent stake in parts supplier Federal-Mogul (FDML), which has had its own financial problems in recent years.

Such a strategy, though, could be tricky to execute because Pep Boys operates both service and parts retailing at many of its locations. Still, Icahn may have little choice but to do it.

"(Icahn) is already going to alienate his retailing peers and the customers he serves with Federal-Mogul because he's becoming a much larger competitor to them," Cristello said. "You are going to have to separate the stores. I don't think it's an overnight deal. I think it's going to take a while for someone to get in there and divide the two businesses."

However, similar deals have been done before, and Icahn will find a willing buyer, the analysts said. In 2012, O'Reilly acquired the auto parts business of VIP Parts, Tires & Service while the closely held VIP retained its service business.

Icahn, who paid a $39.5 million termination fee to Bridgestone to acquire Pep Boys, could find plenty of opportunity in the auto sector. The average age of light vehicles (cars, pickup trucks and SUVs) in the U.S. is 11.5 years because quality has improved in recent years. Although owners are taking their vehicles in for less preventative maintenance, when they do go to the mechanic, they tend to need higher-cost repairs for electronics and other parts.

According to IHS Automotive, nearly 120 million vehicles on the road now are between six and 14 years old.