Tempur-Pedic Agrees to Acquire Sealy for $2.20 a Share

A Selection Of Sealy Beds Sit On Display
Tempur-Pedic International Inc., a pioneer of memory-foam mattresses, agreed to buy Sealy Corp. for $2.20 a share to create a global bedding provider. Photographer: Matthew Staver/Bloomberg

Tempur-Pedic International Inc. agreed to buy Sealy Corp. for about $229 million, combining the two biggest publicly traded mattress companies and ending a more than 20-year run of private-equity ownership in a deal that sent both stocks higher.

The offer of $2.20 a share is 2.8 percent more than Sealy’s closing price yesterday. Tempur-Pedic, a pioneer of memory-foam mattresses based in Lexington, Kentucky, will assume or repay all of Sealy’s outstanding and convertible debt, for a total deal value to $1.3 billion, according to a statement today.

The two bedding companies, both owned by private equity in the past, took divergent paths over the past two decades. Tempur-Pedic, founded in 1992, last year became the biggest publicly traded mattress maker by revenue as sales rose 28 percent to $1.42 billion. Sealy, a 131-year-old company that became a household name, fell to No. 2 with $1.23 billion of revenue and saw its shares plunge more than 90 percent from its 2006 initial public offering to its low point in 2011.

Heightened competition in Tempur-Pedic’s upscale niche has slowed sales growth and caused a more than 60 percent drop in its shares since an April 18 peak. Chief Executive Officer Mark Sarvary said the Sealy combination will spur renewed growth.

“Our success in growing the specialty category has attracted new entrants,” Sarvary told an analyst teleconference today. “It recently had an adverse impact on our business. The merger with Sealy enables us to compete across the whole market.”

Shareholder’s Opposition

Sealy’s second-largest shareholder, H Partners Management LLC, opposed the deal. In a letter today to the board of Trinity, North Carolina-based Sealy, the fund said it was “extremely troubled” the directors didn’t seek approval from all of the company’s owners.

Shareholders owning more than 51 percent of Sealy’s stock and the boards of both companies have approved the deal, the companies said in their statement. H Partners owns 17 percent of Sealy’s stock, according to data compiled by Bloomberg.

“We demand that the board fulfill its fiduciary duty to maximize value for all shareholders,” Usman Nabi and Arik Ruchim of H Partners wrote in the letter. “We reserve all rights to pursue legal remedies to protect the value of our investment.”

Sealy in March came under public criticism by H Partners and FPR Partners LLC, the company’s third-largest shareholder, over the role of private-equity firm KKR & Co. in helping run the mattress maker. The hedge funds said KKR, which owns 44 percent of Sealy, overloaded the company with debt and made strategic errors that reduced its earnings by half.

‘Responsible Partner’

Sealy in response called the claims “combative” and unhelpful. In a March 23 letter, the company said KKR “has been a responsible partner” and said the board’s composition meets New York Stock Exchange guidelines for independence.

Mattress makers had been popular targets for private-equity firms until the economic crisis led to a slump in demand. Tempur-Pedic, which a decade ago was owned by TA Associates Inc., is gaining brands including Sealy Posturepedic and Stearns & Foster from Sealy.

Sealy, which has had five buyout-firm owners since 1989, was acquired by New York-based KKR in March 2004 for about $1.5 billion from an investment group that included Bain Capital LLC, the private-equity firm previously led by Republican Presidential candidate Mitt Romney. KKR paid $5.78 a share for the bedding maker and took it public two years later for $16 a share. The stock peaked at $17.90 in April 2007 and slumped during the U.S. recession that started later that year. It never recovered to pre-crisis highs.

Lower Forecast

Sealy rose 2.3 percent to close at $2.19 in New York. The shares gained 24 percent this year through yesterday. Tempur-Pedic gained 14 percent, the most since April 2009, to $30.64 after declining 49 percent this year through yesterday.

Tempur-Pedic has seen its stock more than double since its 2003 initial public offering. The shares in April started to slump after the company affirmed its 2012 earnings and sales forecast, which fell short of analysts’ estimates. In June, Tempur-Pedic lowered its full-year profit and revenue forecasts, citing a slump in sales in April and May amid increased competition.

Today’s transaction, which is expected to be completed in the first half of 2013, will create cost savings of more than $40 million by the third year, the companies said.

Tempur-Pedic, which sells some mattresses for more than $9,000, specializes in non-spring mattresses, making its products with pressure-absorbing foam that draws on technology first used by NASA to support astronauts in spacecraft.

Pricier Products

Sealy derives about half its sales from mid-priced mattresses that retail for $599 to $999, according to regulatory filings and data compiled by Bloomberg. The company in the past two years has moved to bolster its pricier product lines, producing its first foam mattress, Embody, in 2010 and creating a specialty division to develop new-technology product lines in 2011. Posturepedic Optimum, a line of gel-based mattresses, arrived in stores this year.

“Now, Tempur-Pedic can capture share at the low end memory foam market place and be less concerned about the negative impact on its premium priced products,” Peter Keith, an analyst at Piper Jaffray & Co., said today in a note to clients.

Sealy’s heavy concentration in mid-priced mattresses represents a risk to Tempur-Pedic, according to Kevin Cassidy, an analyst at Moody’s Corp. who follows the bedding industry. While sales of high-end and low-end mattresses have been growing, mid-price products have trailed.

Rogers’s Role

Since 1989, Sealy has traded hands from Gibbons, Green & van Amerongen Ltd. to Clipper Group to Zell/Chillmark Fund LP to Bain to KKR. Bain led a group buying Sealy in 1997 for $833 million and made more than five times its original equity investment upon selling the company seven years later to KKR, the buyout firm led by Henry Kravis and George Roberts.

Lawrence J. Rogers, the Sealy CEO, has worked at the mattress company for 33 years and will remain in his role, reporting to Sarvary, the companies said today. Rogers was picked in 2008 to follow David McIlquham, an 18-year Sealy veteran retained by KKR from Bain’s ownership of the company. KKR said in December that Rogers would retire by the end of 2012.

‘Cheap Price’

Sealy is unlikely to get a higher bid, said Piper Jaffray’s Keith. Tempur-Pedic’s $2.20 a share offer “is a cheap price for a strong brand that appears to be in the early stages of a turnaround,” according to Keith.

Sealy’s bonds rose on the deal’s announcement. The company’s $268.9 million of 8.25 percent bonds due June 2014 climbed 1.5 cents to 101.5 cents on the dollar to yield 7.29 percent as of 10:07 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds last traded at par on Sept. 24.

Bank of America Corp. was Tempur-Pedic’s financial adviser and Citigroup Inc. advised Sealy. Bingham McCutchen LLP provided legal advice to Tempur-Pedic, and Simpson Thacher & Bartlett LLP served in that role for Sealy.

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