Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Mattress Firm Holdings’ management and directors may have some sleepless nights ahead.

Going Downhill
More than four years after its initial public offering, Mattress Firm is the target of two activists.
Source: Bloomberg

Berkshire Partners revealed late Tuesday that it had amassed a 10.4 percent stake in the $1.3 billion mattress retailer and intends to discuss options for enhancing shareholder value, including gaining representation on its board or changing its composition. 

The Boston-based investment firm (not to be confused with Warren Buffett’s Berkshire Hathaway) said it may encourage Mattress Firm to conduct a strategic review and even pursue “other corporate transactions," according to a 13-D filing, which sent the stock as much as 12.9 percent higher in afternoon trading on Wednesday. 

It’s an unusual move, given Berkshire is best known as a private-equity firm and part of a peer group that stays away from transactions involving conflict or hostility, preferring instead to spend years courting management teams ahead of potential deals.

Moreover, private-equity firms are traditionally on the other side of the transaction when activist shareholders push for the sale of all or part of a company. They’ve been willing buyers for the likes of Red Lobster, PetSmart and Informatica, just to name a few.

But in the case of Mattress Firm, which just closed on its acquisition of the owner of the Sleepy's chain last week, Berkshire has taken the matter into its own hands. The Houston-based company’s stock had tumbled 47 percent and shed some $1 billion in market value in the 12 months before Berkshire disclosed its stake amid earnings misses and soft sales. Its enterprise value is now just 6.8 times Ebitda, a steep discount to mattress supplier Tempur Sealy International.

Mattress Firm's earnings have not been growing as quickly as its acquisition-fueled debt load.

Berkshire's efforts at Mattress Firm add to those already being made by shareholder 40 North Management, which has been agitating for change since 2013 (as we've noted, the playing field for activists is getting increasingly crowded). Earlier this week, 40 North penned a letter to Mattress Firms’ board voicing concern about the company’s “worst-in-class” corporate governance.

The shareholder has a point. Private-equity firm J.W. Childs, which took the company public in late 2011 and now owns a minority stake of nearly 39 percent, appears to have control of the board. That’s something one Mattress Firm director mentioned in his December resignation letter, noting that he was concerned about the “true independence of ‘independent’ directors” as well as the disproportionate board representation held by J.W. Childs.

For the record, the company has 10 directors. Four (including the chairman) are partners at J.W. Childs, while three of the four independent directors currently wear or have worn other hats for J.W. Childs as either a director or CEO of companies the firm controls.

That type of control enabled Mattress Firm last week to issue $63 million in new equity that partially funded its acquisition of Sleepy’s. J.W. Childs participated, alongside the president of Sleepy’s and its private-equity backer Calera Capital. In 40 North’s words, the offering -- made while Mattress Firm traded close to its lowest price in more than two years -- was “an egregious insider deal,”  and the opportunity to snap up those shares should have been afforded to all shareholders.  

While it’s not clear if Berkshire’s arrival on Mattress Firm’s shareholder register will lead the company to change its ways, surely now with two activists throwing down the gauntlet, the board will have to wake up.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Berkshire previously had a passive stake of 6.1 percent.

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