TEXT-S&P puts Sealy rating on watch positive on Temper-Pedic deal
Overview -- U.S. based bedding manufacturer Sealy Corp. has agreed to be acquired by Tempur-Pedic International Inc. (not rated) in a transaction valued at about $1.3 billion. -- We believe that Sealy's credit profile will be stronger following its merger with the larger and financially stronger Tempur-Pedic. -- We are placing all of our ratings on Sealy and its subsidiary, including the 'B' corporate credit rating, on CreditWatch with positive implications. Rating Action On Sept. 27, 2012, Standard & Poor's Ratings Services placed all of its ratings on Sealy Corp. and its subsidiary, including the 'B' corporate credit rating, on CreditWatch with positive implications, meaning we could raise or affirm the ratings following the completion of our review. As of Aug. 26, 2012, Sealy Corp. had $760.5 million of reported debt outstanding. Rationale The CreditWatch placement follows the announcement by Tempur-Pedic International Inc. that it has made an offer to acquire Sealy Corp. and Sealy has accepted, in a deal valued at about $1.3 billion. We understand that Tempur-Pedic has received commitments for $1.77 billion in credit facilities and a $350 million bridge loan to fund the transaction. Pending regulatory approvals, the company expects the transaction to close in the first half of 2013. We believe the transaction will strengthen Sealy's credit profile through a stronger combined business risk profile and improved credit measures. Currently, Temper-Pedic has high margins and low leverage, given its moderate debt levels. The combination of the two companies will create a $2.7 billion global bedding manufacturer, with a leading market share of the fast growing U.S. specialty bedding segment. Currently we view Sealy's business risk profile as "weak" and its financial profile as "highly leveraged." We estimate that total adjusted leverage for the 12 months ended Aug. 26, 2012, was about 6.4x, and is currently in the range of indicative ratios for a highly leveraged financial risk profile, which includes leverage of more than 5x. Following this transaction, we estimate that pro forma leverage for the combined company could be around 4x, closer to indicative ratios for an "aggressive" financial risk profile. CreditWatch We will resolve the CreditWatch listing when more information regarding the transaction and related financing becomes available. We will then assess the company's financial policy and the impact of the company's new capital structure on existing ratings. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Use of CreditWatch and Outlooks, Sept. 14, 2009 -- Key Credit Factors: Business And Financial Risks in the Branded Consumer Products Industry, Sept. 10, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Put On CreditWatch To From Sealy Corp. Corporate credit rating B/Watch Pos/-- B/Stable/-- Sealy Mattress Co. Senior secured 10.875% notes due 2016 BB-/Watch Pos BB- Recovery rating 1 1 PIK convertible notes due 2016 B/Watch Pos B Recovery rating 4 4 Subordinated 8.25% notes due 2014 CCC+/Watch Pos CCC+ Recovery rating 6 6 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.