Tempur-Pedic International (TPX) Acquires Rival Sealy (ZZ) for $229 Million

Shares of mattress maker Tempur-Pedic International (TPX: Charts, News) surged nearly 15% yesterday, after the company announced plans to acquire its rival, Sealy (ZZ: Charts, News), for $229 million.

Tempur-Pedic, which specializes in mattresses with NASA-developed foam technology, has lost nearly half of its market cap over the past twelve months, after smaller foam mattress manufacturers steadily chipped away at its once dominant market share. A particularly damaging reduction in full-year forecasts on June 6 severely disappointed investors, causing shares to tumble 49% in a single day. At the time, Tempur-Pedic blamed intensifying competition from privately held rivals Simmons Bedding and Serta for its shrinking market share. "After many years of dominating the foam niche of the bedding category, the world has changed for Tempur-Pedic,"commented Keybanc Capital Markets analyst Bradley Thomas. "(After this deal) Tempur-Pedic will firmly become a part of the normal mattress world, and will no longer be a niche player." Daily Chart Its takeover target Sealy has also struggled over the past six years. Since going public in 2006, Sealy has plummeted 86%, sliding below a dollar at the nadir of the financial crisis in 2009. Sealy has also had ongoing troubles with private equity firm Kohlberg Kravis and Roberts (KKR: Charts, News), which owns 44% of the company. Sealy's second-largest shareholder H Partners, attacked KKR earlier this year, accusing the equity firm of saddling Sealy with debt, "milking it" for fees and causing the company to lose its market share to its rivals. Sealy, which was founded in 1881 in Sealy, Texas, specializes in traditional spring coil beds, sold under its Posturepedic and Stearns & Foster brands. Sealy also announced its third quarter earnings on Thursday, missing analyst expectations by a wide margin, reporting a meager profit of $100,000, down substantially from the $7.5 million it earned in the prior year quarter. Revenue rose 9.4% to $365.4 million. Tempur-Pedic has offered a small 3% acquisition premium, at $2.20 per share, for the struggling mattress maker. Shares of Sealy climbed slightly higher that $2.20, indicating the slight expectation of a higher offer. However, Tempur-Pedic has stated that it has already received consent from 51% of Sealy shareholders for its initial bid, indicating that the offer will not increase. Tempur-Pedic, which already has long-term debt of $680 million, will inherit an additional $750 million in debt from Sealy. The company has secured $1.77 billion in financing from Bank of America to help pay off the new debt load. Merrill Lynch will help Tempur-Pedic arrange and manage its debt. The two companies will continue operating independently, with Sealy CEO Larry Rogers remaining in charge of the new subsidiary and reporting to Tempur-Pedic CEO Mark Sarvary. By combining the two companies, Tempur-Pedic's products will reach over 80 countries, and generate over $40 million in cost synergies over the next three years. Last year, Tempur-Pedic became the largest publicly traded mattress company by revenue. The merger with Sealy is expected to further cement its lead. Fundamentally, Tempur-Pedic is undervalued, trading at 10 times forward earnings with a 5-year PEG ratio of 0.76. The stock does not pay a dividend. Other News About TPX Tempur-Pedic to Buy KKR-Backed Sealy for About $229 Million Tempur-Pedic takes over a key rival. Tempur-Pedic to Buy Rival Sealy as Specialty Bed Dominance Slips Can Tempur-Pedic bounce back by acquiring Sealy? Other Stocks in the News RIM'sEarnings Could Be Ugly With No BB10 And Sliding Market Share Is this the end of the line for RIM? Google's Autonomous Car Gets a Boost Is Google still planning on creating a self-driving vehicle? Copyright 2012 by InvestorGuide.com, Inc. 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Published on Sep 28, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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