* 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 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
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
"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.