* Tempur-Pedic to pay $242 mln, take on $750 mln of debt
* Offer represents 3 pct premium to Sealy's Wednesday close
* Shares trade above $2.20 offer price
* Companies to operate independently
* Second largest shareholder H Partners opposes deal
By Juhi Arora and Arpita Mukherjee
Sept 27 (Reuters) - Tempur-Pedic International Inc will acquire rival Sealy Corp for about $242 million and take on its debt of about $750 million, as the once-dominant specialty mattress maker seeks to fend off rivals by broadening its product range.
Tempur-Pedic, which pioneered the specialty bed market with foam-based technology developed by NASA, has been struggling to maintain market share against fast-growing rivals in the burgeoning market for foam mattresses, whose reputed therapeutic properties make them popular with aging baby boomers.
The company's market value dropped by half to about $1.5 billion in June after it slashed its full-year forecasts, blaming intensifying competition from privately owned manufacturers such as Simmons Bedding Co and Serta Inc, whose offerings tend to be cheaper.
"After many years of dominating the foam niche of the bedding category, the world has changed for Tempur-Pedic," Bradley Thomas of KeyBanc Capital Markets said in a client note. "Tempur-Pedic (with this deal) will firmly become a part of the normal mattress world, and will no longer be a niche player."
Investors gave the deal their stamp of approval by driving up Tempur-Pedic's shares as much as 23 percent, giving the company a market value of just under $2 billion.
Sealy, the long-time industry leader, will give Tempur-Pedic expertise and strong brands in the market for traditional inner-spring coil beds with names including Sealy Posturepedic and Stearns & Foster.
The combined company will have a presence in more than 80 countries in every product category, Tempur-Pedic said.
Tempur-Pedic, whose brands include Tempur and Tempur-Pedic, said it expects to generate more than $40 million in cost synergies over three years.
"Sealy has come off a very weak five-year performance record," said Gerry Borreggine, chairman of the International Sleep Products Association and president of mattress manufacturer Therapedic International.
"The industry's growth has outpaced Sealy's growth by double digits, so Sealy has been a distressed company in that regard and has consequently become of good value on paper," he said.
Industry consultant Barrie Brown said that until now Tempur-Pedic, whose beds can sell for than $2,000, has been shut out of the market for cheaper mattresses.
"Now with Sealy they are going to have access to consumers that buy at $1,000 and $1,500, so it really broadens the market for them."
The offer price of $2.20 per share represents a 3 percent premium to Sealy's Wednesday close of $2.14. Sealy shares traded above the offer price for most of the morning on Thursday, indicating that some investors expected a higher offer.
Tempur-Pedic shares were up 13 percent at $30.18 in afternoon trading, while Sealy shares were trading at $2.19, a cent below the offer price.
Tempur-Pedic, which went public in 2003, said it had received consent from shareholders holding about 51 percent of Sealy, which was founded in 1881 in the Texas town of the same name. It said no other shareholder approvals are needed to complete the deal.
Private equity firm Kohlberg Kravis Roberts & Co owned about 44 percent of Sealy as of June 30, a remnant of its $1.5 billion deal to take the company private in 2004. KKR was among shareholders backing the buyout, a source close to the deal said.
"KKR will move out and I think that is a positive for Sealy," said Brown.
Separately, in a letter to Sealy's board on Thursday, H Partners, the company's second-largest shareholder, opposed the sale, saying the offer drastically undervalued Sealy.
"With effective execution, we believe Sealy's long-term value is at least $3 billion or $7.50 per share," the investment management firm wrote.
Earlier this year, H Partners launched an attack on KKR accusing it of wiping out 90 percent of the mattress maker's value since it went public in 2006, saddling it with debt and milking it for fees.
H Partners also said in the letter that it would consider legal options to protect the value of its investment in Sealy and will scrutinize actions taken by KKR and its affiliates.
Tempur-Pedic said it had secured $1.77 billion in financing from Bank of America for the deal and to pay down existing Sealy and Tempur-Pedic debt. Tempur-Pedic had long-term debt of $680 million as of June 30.
Merrill Lynch will act as lead arranger and bookrunning manager for the debt.
After the deal, Tempur-Pedic and Sealy will continue to operate independently. Larry Rogers will remain chief executive of Sealy and report Tempur-Pedic CEO Mark Sarvary.
Sealy's third quarter earnings, also announced on Thursday, missed analysts expectations as expenses rose. The company reported net income of only about $100,000 in the third quarter, compared with a profit of $7.5 million a year earlier. Sales rose 9.4 percent to $365.4 million.