I'm excited to share the launch of our new brand: Boring Mattress Co. Here's a bit from our announcement blog post:

Back in 2012, I co-founded Tuft & Needle, one of the earliest direct-to-consumer mattress brands. Tuft & Needle pioneered the concept of a single-model, universally-comfortable mattress sold at a fair price and delivered to your door. Customers loved the idea and the brand grew like crazy.

We started Tuft & Needle with just our personal savings and grew it to over $200 million in sales and disrupted the traditional brick & mortar retail experience. Then in 2018, we merged with Serta Simmons.

Today, the mattress market’s a total mess. It’s way too complicated, full of useless gimmicks, and it’s a real pain for anyone just trying to find a decent bed. In the past, you only had to dodge the pushy sales guy at the local mattress store. Now, shopping online bombards you with too many brands and a crazy amount of mattress models.

Picture this: over 200 mattress brands online, each trying to one-up the others with the flashiest tech or the latest “revolutionary” material. They toss around phrases like “sleep technology” and “advanced comfort,” but mostly, they’re just sticking big price tags on ordinary mattresses.

Just when you think the mattress market can’t get any more crowded, every brand that’s ever sold a pillow, bedsheet, or piece of furniture decided they want to crash the mattress party too.

On top of all that, mattress review blogs made a bad situation worse. Try a quick google search - for anything mattress related, really. You get pages filled with so-called “Best Mattress” lists and glowing reviews that sound too good to be true. (Spoiler alert: these review sites slap five-star ratings on the brands that offer the highest sales commission.)

It’s a circus out there, and consumers are trapped in a cycle of hype and disappointment.

This time last year, I was ranting about how awful online mattress shopping had gotten. The brands that once shook up and “disrupted” the market had ditched their roots, chasing luxury pricing and slick sales tactics instead…

Read the rest on boring.co

Financial leverage works both ways. If Serta Simmons Bedding (“SSB”) performed well, Advent International's $3 billion investment in the mattress conglomerate could have easily doubled in equity value. Merged into the world’s largest mattress manufacturer in a feat of financial engineering, the SSB house of brands brought together Serta, Beautyrest, Simmons, and Tuft & Needle. However, the company's punishing debt load of $2 billion left little room to breathe when the world changed around it. The past year has been especially cruel to the business — reliving the nightmare from 2009 — as it writhed around, grasping for any pocket of liquidity within reach.

On January 23, 2023 at 11pm, SSB filed for Chapter 11 bankruptcy.

As tragic as it may be, we are witnessing a cleansing of the broader market, long overdue, to restore the harmony and the balance lost 35 years ago when a torrential tide of cheap capital swept in.

Leverage Derailed

Today's mattress industry looks a lot different compared to 2012 when Advent International developed the investment thesis for what would become Serta Simmons Bedding. First combined in 2009 as AOT Bedding Super Holdings by Ares Management and Ontario Teachers, Serta and Simmons were initially managed as separate entities. Serta’s headquarters remained in Chicago, and Simmons’ in Atlanta — each with its own CEO. Together these legacy brands dominated the distribution channel of mattress stores.

Serta is coming off one of the most successful years in bedding history. Sales for the Serta brand soared 26.7% last year, to $1.47 billion, as Serta lengthened its lead over No. 2 Sealy to $261 million. Simmons, with wholesale bedding shipments last year of just over $1 billion, is the No. 3 bedding producer.

Serta and Simmons seemed invincible as household names that would remain timeless no matter what. In August 2012, Advent raised $2 billion in debt to acquire control of the combined entity for a purchase price of $3 billion. Unlocking the synergies from what was perceived to be two bloated orgs should have easily paid back the purchase price and then some.

Advent International Corp. will use the new $1.233 billion term loan B and $725 million senior unsecured notes, along with $760 million new equity and $370 million of rollover equity from the company's current owners, to purchase a majority stake in the company for approximately $3 billion, refinance existing debt, and pay transaction fees.

Fast forward to today, consumers are less willing to pay higher prices for mattresses, which have become brutally commoditized over the past decade. For good reason: Mattress Stores Are Greedy billboards, birth of a mattress unicorn, Amazon's aggressive expansion into furniture, $250 green tea mattresses, and so on. Brands have to try harder. Competitive pricing is cutthroat. Claims about tech innovation need to be real. Millennials don’t want their grandparents’ hand-me-down brands. Even Amazon Prime is too slow.

By the end of the cycle, over 170 bed-in-a-box lookalikes were vying for attention wherever you turned online, from mattress ads flooding Google and Facebook to sponsoring all your favorite podcast shows. After the hundreds of millions of dollars in collective ad spend deployed by bed-in-a-box startups, consumers were properly conditioned to expect a quality mattress at a fair price with the click of a button.

The wave of disruption washed away many of the industry's past tricks and gimmicks. Price transparency and streamlined shopping experiences bred more discerning customers. Finally waking up to reality, traditional mattress retailers and manufacturers acknowledged the need to change the way they did business — or, as they like to say, to meet the consumer wherever she is. So in a promising move, in 2018, Serta Simmons Bedding merged with Tuft & Needle, the bed-in-a-box pioneer that flipped the industry on its head.

However, private equity’s zeal can quickly turn into impatience. Viewed through the cells of a financial model, EBITDA is the only source of truth. An over-leveraged company in distress is prone to suffer from bouts of amnesia, and it is doomed to relapse into old habits:

According to one study, expanding margins accounted for only 6% of private-equity value-creation during the past five years; as pricing-power becomes the focus of all firms, defending profitability will take priority over growth. The penalties for failing to adapt will be harsh. Hefty debt piles (average leverage in large American buy-outs is now more than seven times ebitda, the highest since 2007) make getting this right critical to avoiding the bankruptcy courts.

Unfortunately for cash cows, once neglected and undernourished, what was once easy milking will turn into squeezing blood. Now, the mattress industry faces downward-sloping demand, which ultimately impacts the bottom line for mattress manufacturers like SSB. A bottom line that used to be rich enough to pay off billions of dollars of debt.

Post-Pandemic Woes

Needless to say, the pandemic must take some blame. Serta Simmons Bedding was hit hard by the closures of retail stores and factories. Margins — key to extracting that sweet EBITDA — got crushed by increasing commodity, transportation, and labor costs.

In March before the coronavirus hit the US, the company — which in addition to Serta and Simmons owns the Beautyrest and Tuft & Needle brands — had $100 million on its balance sheet, and was generating more than $200 million in EBITDA, or earnings before interest, taxes depreciation and amortization, according to Moody’s Investor Service.

Conditions improved somewhat in 2021 and the first half of 2022. More recently, though, inflation, higher interest rates, and shifts in spending to other categories have all contributed to lower demand for SSB's core products. As ISPA's Ryan Trainer observed coming out of the 2008 recession, mattresses are a deferrable purchase, and consumers will just make do with what they have when money gets tight:

Experience shows that mattress sales are influenced strongly by trends in the national economy, especially by changes in consumers’ disposable income, sales of new and existing homes, and changes in consumers’ wealth.

According to ISPA data, the average selling price (AUSP) for total mattress sales grew 15.5% year-over-year in 2021 and grew over 8% in 2022. But this trend of price increases driven by inflation should not be mistaken for brand strength or pricing leverage.

When Things Fall Apart

By applying the state-of-the-art in financial engineering, private equity is supposed to help companies grow and thrive. Armed with loads of cheap capital and legions of ivy league MBAs, these investors resurrect dying companies, cut the fat from bloated organizations, accelerate lifetime profits, and generally take bigger risks for bigger rewards. But when a leveraged buyout goes wrong, the business turns into a self-perpetuating, self-feeding process of decline.

SSB’s dire situation as of September 2022:

Serta Simmons has $345 million of cash as of 2Q 2022 (down from $518 million at year-end 2021) and $171 million of capacity on its ABL revolver (factoring in $29 million letters of credit outstanding). Moody’s expects negative free cash flow of $125 million to $145 million over the next 12 months (including cash priority term loan interest payments that the company records as a financing outflow).

Then in December, heading into the holidays:

Serta Simmons Bedding is preparing to seek bankruptcy protection as soon as January, according to people with knowledge of the situation. The closely held mattress manufacturer has been in confidential talks with its creditors over a restructuring plan, which may involve giving control to certain first-lien lenders, said the people, who asked not to be identified because the matter is private.

When a company struggles to avoid breaching the secured leverage covenant ratio and pay the interest on its debt, it becomes heavily focused on profitability and maximizing short-term gains. This singular attention on survival leaves little time and patience for creative experimentation or innovation, which ironically makes the bad situation worse. The flywheel begins spinning in the other direction, becoming the company's undoing.

#1: Hard to Gain, Easy to Lose

In a zero-sum environment like the mattress industry, each missed opportunity can be detrimental. The distraction from R&D and brand building further exacerbates the company’s financial struggles and leaves it vulnerable to what should be insignificant competitors.

Tempur-Sealy ($TPX) owns the Tempur-Pedic, Sealy, and Stearns & Foster brands. Despite having a similar profile as a legacy company conceived by financial innovation, Tempur managed to thrive in relative terms over the past couple of years.

From 2019 to 2021, TPX generated strong top-line of 15%, 18% and 34%, respectively, with revenue increasing to $4.9 billion from $2.7 billion and EBITDA, based on Fitch adjustments, increasing to $1.04 billion from $401 million.

In the latest Q3 business update, Tempur boasted a 20% gain in slots on mattress store floors:

We are pleased to share that we expect to expand our Stearns & Foster spots by third-party retailers in the U.S. by over 20%, demonstrating retailer support for our expansion strategy. To be clear, we believe the slot gains will be from competitors, not other Tempur Sealy brands. Many of these incremental slots will be filled with our new Stearns & Foster Lux Hybrid and our new Stearns & Foster Reserve Mattress.

Compared to SSB, Tempur did not necessarily do anything better — it just didn't do anything worse. Tempur’s product roadmap has largely been driven by a copycat strategy: bagged not boxed, sloppy seconds sleep tech, and a Purple mattress knockoff as shamelessly admitted:

As the largest bedding manufacturer in the world, there’s probably not a bed we can’t make if we believe that there’s a market there that’s worth attacking. And so we’re going to attack that market.”

Separately, no longer willing and able to sustain zombie companies, a non-ZIRP environment killed off many of the bed-in-a-box disruptors that had been frantically siphoning away sales. Waking up with a violent hangover, Silicon Valley VCs decided to stop funding unprofitable contenders in the mattress space — or actually DTC in general — and have moved onto more interesting pastures, like crypto and AI.

The second type of tech company is something like WeWork. This type of tech company is essentially a digital version of something that existed previously. These companies can gain traction due to the convenience factor unlocked by the digital transformation, but there isn't much extra value to capture. When interest rates were 0, VCs and the market as a whole were valuing these companies the same as true tech companies. Now that investors [are] more discerning with their money, the valuations of such companies is popping.

All the while, a business under the stress of debt curls itself into a ball — in obligation towards a covenant ratio, shedding dead weight, but at the same time losing much of the essence that made it successful in the first place.

A forthcoming reboot would be a cleansing sacrifice. The timing is ideal in the market for SSB’s brands to shake off the shackles and re-emerge. What that means is yet to be seen, but I am hopeful.

Regardless of how the SSB bankruptcy unfolds, we should feel reawakened by the opportunity in the mattress industry that continues to need fixing and fresh perspectives.

A powerful quote from Apollo CEO Marc Rowan: “You want chaos, you want things to be shaken up, you want the system to brought down and built up again. Just when you think the world is coming to an end and things are never going to get better, that is the time to build a career and build the next great fortune.”

Key details from the press release:

SSB has entered into a Restructuring Support Agreement with key financial stakeholders that will significantly reduce the company’s debt and enable the company to continue making critical investments in its business and brands. To implement the restructuring contemplated by the agreement, most of SSB’s U.S. corporate entities have initiated a voluntary pre-arranged court-supervised process under Chapter 11 of the U.S. Bankruptcy Code.

The restructuring will substantially reduce the company’s funded debt from approximately $1.9 billion to approximately $300 million and enable the company to continue making critical investments in its business and brands. The company has received a commitment for a $125 million exit ABL Credit Facility available upon SSB’s emergence from Chapter 11. The company has also obtained a debtor-in-possession financing in the form of a $125 million ABL Credit Facility. Upon Court approval, the new financing, along with approximately $170 million of cash on hand as of the filing date, and cash generated from the company’s ongoing operations, will be used to support the business during the court-supervised process.

SSB has filed a number of customary “first day” motions seeking Court approval to support its operations during the court-supervised process, including the continued payment of employee wages and benefits without interruption, as well as the continued support of its customer programs and consumer product warranties. The company is also seeking Court permission to pay suppliers, either during the Chapter 11 process or upon emergence from it, for goods and services that were provided prior to the bankruptcy filing date. The company expects business to continue as usual throughout the process and trade vendors and suppliers will be paid in full under normal terms for goods and services provided on or after the filing date.

Clearly this is a disappointing day for current and former employees who believed in our mission. I wish the outcome would have been different. We all had high hopes for the combined company's potential.

From a customer's perspective, bankruptcy doesn't mean that the Tuft & Needle brand is going away. This could even be a positive turning point for the products and the experience as of late. The Chapter 11 process lets you default on some debt, renegotiate contracts, and you often come out of bankruptcy stronger than before.

I’d like to believe so as well, that bankruptcy shouldn’t make a difference for customers, and if anything, it will be good. Things must burn to emerge.

But these restructurings usually entail a change of control in the company. When we agreed to merge Tuft & Needle with Serta Simmons, we had faith in the pedigree of Advent International and the current board, which includes business legends like former UTC CEO George David and GAP CEO Glenn Murphy, to be great stewards of the business.

In hindsight, the danger of leverage may seem obvious, but the events that unfolded were far from expected. More on that here:

The Burning Bed

Nightcap

Financial leverage works both ways. If Serta Simmons Bedding (“SSB”) performed well, Advent International's $3 billion investment in the mattress conglomerate could have easily doubled in equity value. Merged into the world’s largest mattress manufacturer in a feat of financial engineering, the SSB…

Read more

3 years ago · 2 likes · Daehee Park

Now, the brand that we built will be traded for debt and passed off to new owners. Not sure who those will be yet, but the ownership will likely derive from the creditor group (Apollo, Eaton Vance, etc.) in some shape or form.

It has been some time since I’ve been operationally involved with Serta Simmons and the business. But, regardless of the outcome here, I care about the future of the Tuft & Needle brand.

I wish the best of luck to the teams as they work through the bankruptcy and come out on the other side.

Serta is working with advisers Weil, Gotshal & Manges, Evercore Group and FTI Consulting, according to the statement. Gibson Dunn & Crutcher and Centerview Partners are advising creditors, while Ropes and Gray are working with Advent.

The case is Serta Simmons Bedding LLC, 23-90020, US Bankruptcy Court for the Southern District of Texas.

Try searching for any mattress-related keyword on Amazon, and you will likely find Zinus occupying not just one but many of the top rankings. During its growth stage, the company launched a new SKU almost every day. Hard to believe, but Zinus now boasts a massive online catalog of over 1,500 SKUs.

While the other DTC mattress startups were squabbling over Google ads and courting Instagram influencers, this sleeper company came out of nowhere and went all in on Amazon. The timing could not have been more fortuitous.

From its humble beginnings as a brick & mortar OEM mattress manufacturer (e.g. Walmart’s “Spa Sensations”), Zinus saw the online mattress space starting to heat up in 2014, as the next biggest thing in e-commerce. VCs were scrambling to pump billions into the next cohort of “DNVB” disruptors. Amazon itself was doubling down on the Furniture category, to encourage consumers to buy big & bulky items as part of the broader shopping experience. What’s more, at the time, the China-to-US supply chain was humming along at peak performance.

For the very first Prime Day 2016, in a seminal moment for the mattress industry, the Zinus Green Tea Mattress made its explosive debut. College students and young millennials bought Zinus in droves — a brand-new mattress for less than the price of a textbook.

Zinus continued feeding off its own success and, by 2018, on its own, represented over half of the mattress sales on Amazon.

Zinus successfully IPO’d in Korea in 2019.

Then just this past year, in 2022, Zinus was acquired by Hyundai’s Department Store Group for an astonishing $730 million. (Unbeknownst to many in the US, the Hyundai conglomerate operates 55 subsidiaries in sectors as diverse as construction, logistics, finance, steel works, and insurance.)

“A God-Tier Arbitrage”

“We strategically established a global management organization that can utilize the division of labor by country most efficiently.”

Very few brands — even looking beyond the mattress category — have played the game of Amazon to this level of cunning and sophistication. Prior to Zinus, the company’s founder earned the moniker “TentPole Lee” in the 90s because he masterfully exploited international trade and scaled his camping tent business, Jinwoong (dba “Northpole”), to $300 million in sales and a third of the global market share.

There are two secrets to NorthPole's success: its laserlike focus on the mass merchandiser and its ability to harness China's manufacturing prowess.

In the old days, NorthPole sold to dozens of importers and wholesalers of camping equipment, sporting goods and luggage in the U.S., who slapped their own brand or that of their customers on NorthPole's products. Now the company cuts out the middlemen and sells directly to a handful of mass retailers mostly under their private labels, passing on much of the savings to consumers. "Follow the discount retailer," is how Sun describes the strategy. The mass merchandisers' private labels are winning market share from such brands as Coleman and Samsonite, the big casual luggage maker.

NorthPole develops and designs new products each year to be sold under exclusive store brands or the private labels of its mass-merchandising customers. For example, Wal-Mart's Rome line of luggage is actually owned and produced by NorthPole. Quest and Versalite tents, sold in wholesale clubs, are also NorthPole labels.

Selling direct to the retailer brings NorthPole closer to the consumer. In fact, such stores as Wal-Mart are in effect asking NorthPole to manage the store shelves its products appear on. The supplier suggests packaging, pricing, store displays and new products. Once NorthPole burrows its way into a retailer, it extends its camping shelf space from tents by adding sleeping bags, air mattresses and backpacks. Then it increases its floor space by moving on to the lawn and garden and luggage shelves at the same retailer.

The Chinese production platform enables NorthPole to ramp up output quickly and churn out high-quality merchandise at low prices. Lee built his first factory in Xiamen, Fujian province, in 1988.

Zinus repeated the same playbook — this time with Amazon as a boon:

• Directly operated its own plants in China to manufacture roll-packed mattresses cheaper than any US competitor and to secure government subsidies.

• Emptied out countless shipping containers into Amazon’s fulfillment centers to sell mattresses below cost to American consumers with incredible inventory turnover.

• Collaborated with Amazon to prime the platform’s own retail growth narrative. As an incentive to help grow the Furniture category, Amazon heavily subsidized “marketing co-op fees”, which are typically charged at rates north of 10% (an effect similar to VC-subsidized customer acquisition costs).

• Unloaded $200 million of shares onto Korean retail investors through an IPO with a “#1 mattress brand in the US” story. Over 97% of company revenues were from exports to the US. To American consumers, Zinus was a cheap made-in-China mattress; but to Korean investors, Zinus positioned itself as a premium and innovative brand — a nice boost to the valuation multiple.

  

“Golden Goose” Amazon Playbook

Zinus discovered its virtuous cycle for unstoppable growth on Amazon:

• Globalize procurement in countries with low cost and high productivity to manufacture "just good enough” quality products.

• Overwhelm Amazon with speed-to-market, and saturate the catalog with every imaginable variation of mattresses at unheard-of low prices. Also develop and supply all the high-value accessory products to secure the programmatic upsell in the “Frequently Bought Together” recommendations.

• Drop prices even lower during Amazon promotional events, e.g. Prime Day, Black Friday, and the frequent “lightning deals”. Aggressively squeeze out competitors from zero-sum promo slots. Treat any losses as customer acquisition costs. Gain the benefits of volume for the backend supply chain.

• Spike 4+ star reviews through the special promotions above. As an industry rule of thumb, consumer expectations for mattress quality & longevity are greatly reduced for purchase prices below $500, compared to above $800. The consumers’ perceived value based on the low prices will be predictably favorable.

• Amazon’s search algorithm loves the velocity of sales and reviews, and this prioritizes featured placements for product listings. Reap the rewards of organic sales afterward.

Future of Zinus

In the long run, though, the harsh reality is that Zinus is a made-for-Amazon brand. Zinus also does phenomenal numbers with Walmart and Wayfair. But in the same way as Amazon, these retailer partnerships do not require much heavy lifting by the brand. To date, Zinus’ astounding review counts have mattered far more than its brand in the consumer’s buying decision. Or, you may go as far as to say, Zinus’ reviews are the brand.

At this point, American consumers have come to associate Zinus with a cheap Amazon mattress. Ironically, this is a similar problem faced by Hyundai Motors, which has taken decades and billions in advertising dollars to try to dig itself out of that hole, until it finally threw up its hands and spun up a separate luxury brand, Genesis. That may be the path required for Zinus as well.

Despite Zinus’ claims of being fully vertically integrated, in practice, it is an Amazon mattress that happens to have its own website. Rather than being DTC-first, Zinus is kind of a reincarnation of a legacy mattress manufacturer that is optimized for filling the digitized floor slots of these e-commerce retailers. See Zinus’ sales channel mix:

Zinus is trying hard to wiggle itself out of the identity trap as a “pseudo-brand”.

These “pseudo-brands,” as some Amazon sellers call them, represent a large and growing portion of the company’s business. These thousands of new product lines, launched onto Amazon by third party sellers with minimal conventional marketing, stocking the site with disparate categories of goods, many evaporating as quickly as they appeared, are challenging what it means to be a brand.

“I think the name of the brand has become less and less important,” said CJ Rosenbaum, an intellectual property lawyer who estimates that between 10 and 15 percent of his clients are seeking basic registrations for cross-border e-commerce brands.

Mr. Wang added that “marketing is probably more important” than the names themselves. That’s marketing in the Amazon sense: Amazon ads, Amazon reviews, Amazon search. Lately, he’s seen an uptick in attempts to copy brands that are popular only on Amazon.

In late 2017, recognizing that it was overly dependent on these mass retailers — often quick to act on its own whims, selfish, and disloyal — Zinus rebranded and re-launched zinus.com.

Although the design and copy have been cleaned up over the years, Zinus’ brand voice and visuals are out of touch with the American consumer. The disconnect stems from Zinus employing design and marketing talent out of Korea, where the company is headquartered. The US org structure is optimized toward warehouse operations and channel sales, reflecting the operating model for the arbitrage described above.

Now, with the recent acquisition by Hyundai, Zinus’ focus is diverted from winning on Amazon to international growth and expansion. This also includes gaining a foothold in the Zinus home market of South Korea and taking advantage of the distribution within Hyundai’s own department stores (see “The Hyundai” mall and Livart).

That kind of greenfield opportunity was the IPO narrative, at least. But this will likely be a detrimental distraction to what has led to Zinus’ success to date.

After filing for a much-anticipated IPO exactly one year ago, Mattress Firm ($MFRM) ultimately called off the plan, laying blame to the economic downturn.

The mattress retailer first filed for the IPO in January 2022, indicating it was looking to raise $100M, a number that was likely a placeholder and subject to change. Shares were expected to trade on NYSE under the symbol MFRM.

The IPO would have marked a return to the public markets for Mattress Firm, which was taken private by Steinhoff International (OTC:STHHF) in 2016 for $3.8B. The retailer ended up filing for bankruptcy in 2018, but emerged a month later. It shuttered around 700 stores as part of its reorganization.

The IPO was supposed to be Mattress Firm’s redemption arc. The company’s demise began in 2018 when its newly anointed South African owner, Steinhoff International, capsized in an accounting scandal spanning multiple continents and dragged the subsidiaries down with it. In short order, an executive cleaning crew used the opportunity to exit leases on 700-odd redundant stores (like the ones you would see facing each other on the corner) under cover of a chapter 11 restructuring.

A ray of hope did come with the post-pandemic housing bubble, and the business happily served up 0% interest-financed mattresses for all the new movers. At the tail-end of that period, grabbing the opportunity to paint a narrative of perpetual hockey stick growth, Mattress Firm filed the S-1. Unfortunately, though, as we saw with many other parts of the economy, as quickly as the sales came they were gone.

For Steinhoff, with better luck and timing, a successful Mattress Firm IPO could have been a boon for its own (in)solvency.

Meanwhile, Steinhoff has been found to be technically insolvent. In mid-December it announced reaching an agreement with some of its largest creditors to extend its debt maturity. In the new proposal, creditors have 80% economic interest in Steinhoff, with shareholders retaining just 20%, housed in an unlisted entity.

The news saw the share plunge over 60% and remain around R0.50. The former Top 40 share – which fell from grace after a massive accounting scandal came to light in 2017 – is down over 99% from its all-time high of close to R100 in 2016.

Predicted a year ago on finance twitter:

With the exit path torched, the markets are now speculating on Mattress Firm’s next move. This (suspiciously confident?) speculation by Wedbush expects that Tempur-Sealy could snatch up the retailer for cheap, considering “the possibility of very accretive acquisitions—namely Mattress Firm.”

Further, Basham sees [Tempur-Sealy] as a potential acquirer of the Mattress Firm after it abruptly withdrew its plans to IPO on Monday.

“We believe that Mattress Firm is a candidate for acquisition particularly after it officially withdrew its IPO yesterday, just over a year since it filed to go public. Moreover, parent company Steinhoff’s most recent statement in mid-October suggests it could be strongly considering options other than an IPO,” he explained. “TPX is the most logical strategic buyer given its size and the fact that it has been successful in its recent acquisitions of leading UK retailer Dreams and Southeast US retailer Innovative Mattress Solutions.”

Given these potential share catalysts, Basham added Tempur-Sealy to his Best Ideas list and hiked his price target to $45, up from $30.

What a Tempur acquisition could look like

Without a doubt, Mattress Firm would be the holy grail for a mattress manufacturer operating at the scale of Tempur-Sealy (or Serta Simmons). Overnight, the acquiring company could double or triple sales by maximizing distribution in over 2,300 Mattress Firm stores.

Essentially, Tempur would fill Mattress Firm’s floor space with all of its own brands: Tempur-Pedic, Stearns & Foster, Sealy, and Cocoon. Many consumers don’t know or don’t care if all the brands are actually made by the same company — the same as shopping at Trader Joe’s. They want the illusion of choice. Tempur could even spin up additional brands to fill in the gaps (e.g. beds for gamers). Moreover, as a bonus, competitors heavily relying for growth on the Mattress Firm sales channel (Purple) would get wrecked through displacement, creating further opportunities for consolidation.

Why it probably won’t happen though

However, the chances of Mattress Firm getting acquired by Tempur-Sealy are slim. The pump-and-dump for the numbers would be a short-term play, and Tempur’s management can probably see the risks in further tarnishing the Mattress Firm brand.

Current financial constraints aside, the reverse scenario would make more sense. Suppose Mattress Firm, as the retailer, were to acquire a collection of product brands like Tempur-Sealy. In that case, Mattress Firm could increase the display priority for its own brands (a la Beats and Apple Store) while maintaining the perception of neutrality (Amazon’s private label play). Mattress Firm already has a growing collection of private label mattress brands such as Sleepy’s and the god-awfully named Tulo bed-in-a-box, so this would be nothing new.

But the same benefits do not apply the other way around, where one of the product brands owns the retailer that is at the same time trying to sell third-party products. The value in the retail chain is keeping a semblance of independence towards both consumers and partner brands. It would be uncanny for a Mattress Firm salesman to compare the virtues of one brand against another when it’s all coming from the same factory.

Furthermore, acquiring Mattress Firm would conflict with Tempur-Pedic’s own branded stores. Tempur owns and operates ~100 of these stores in prime locations, and they are a bespoke, premium experience compared to your typical Mattress Firm hanging out in a strip mall.

At this point, Tempur-Sealy is a well-oiled cash printing machine focused on milking its super brands. Acquiring a retail Frankenstein — conceived through a long history of rollups such as Sleep Train and Sleep America — would be akin to tossing a grenade into the Tempur org. A small army of McKinsey consultants would be in their offices the next day, spitting out 100-page decks on change management and strategic transformation. The two organizations, polarized by entirely different cultures and strategic focus areas, would likely cause havoc. Tempur-Sealy’s core competencies should be brand marketing and manufacturing, not retail and merchandising.

So that leaves the question, who will take Mattress Firm off of Steinhoff’s hands? At one point in the past, there was speculation that Amazon would be a potential acquirer of Mattress Firm as a relatively cheap way to bully their way into the furniture category. But those days are long gone, and Amazon is now shutting down physical retail-related operations, including their own 4-star stores or whatever they were terribly named. So for better or for worse, it may be time for private equity to play musical chairs and for Mattress Firm to get handed off to the next one.

In March 2020, $2 billion of Serta Simmons Bedding’s first-lien loan crashed to 39 cents on the dollar. Sensing the opportunity, a coalition of distressed debt investors led by Apollo (with participation from Angelo Gordon and Gamut) bought up $600 million of the loan.

Without necessarily singling out SSB, Apollo’ strategy was par for the course in this era’s market environment:

Apollo’s $25 billion private equity fund has shifted “almost entirely” to a distressed strategy under which it aims to gain control of companies by investing in their debt… Right after the “market dislocation” thirteen years ago, Apollo’s private equity fund VII was two-thirds invested in distressed, he said, compared with less than five percent for its next fund. “That is the bandwidth vis-à-vis distressed-for-control that can come out of the private equity funds.”

A Modest Proposal to Get J. Screwed

Just three months after purchasing SSB’s debt, Apollo attempted to activate the trap door against SSB. This collateral-stripping maneuver was popularized by a number of high-profile cases — first made famous by J. Crew, but it also transpired in iHeartMedia, Petsmart, Revlon, Neiman Marcus, Travelport, Cirque du Soleil, and so on. SSB barely missed the list.

How J. Crew earned the title in 2016:

[J. Crew] put its brand name and some other intellectual property into a new entity in the Cayman Islands that was beyond the legal reach of its existing lenders. Then it used that new entity to borrow $300 million from Blackstone Group LP. The existing lenders, who saw valuable collateral disappear before their eyes, cried foul, but J. Crew argued that its move was perfectly legal under terms of the loan documents. (The issue was never litigated.) Since then, lenders to other companies have worried about being “J. Crewed”—i.e., victimized by a deal that siphons away collateral backing their loans. It rhymes with another word.

What Apollo proposed to SSB was a textbook example of just that. From the court filings:

Led by late-comer behemoth Apollo, which only first purchased its Serta debt three months ago at deeply discounted trading prices, these Plaintiffs have spent the better part of the past three months engaging in an elaborate scheme to strip away the other First Lien Lenders’ Collateral for their sole benefit. In these trying times, Serta finds itself facing a liquidity problem, and these Plaintiffs tried to take full advantage of Serta’s plight. They proposed a predatory financing transaction to rip away Serta’s “crown jewel” trademarks for the nationally recognized Simmons/Beautyrest and Tuft & Needle mattress brands (worth at least hundreds of millions of dollars) into a subsidiary outside the reach of all other First and Second Lien Lenders’ claims that would have secured Plaintiffs’ own new structurally senior facility alone.

Apollo would take the “crown jewel” IP assets, being used as collateral for secured loans, and move them into a newly created subsidiary. Then that subsidiary would borrow new money. This would allow Apollo to strip the collateral being used for existing loans and kind of double-dip with it.

In exchange, Apollo dangled the carrot of operating capital, knowing that runway was running out for SSB. (So predatory.) All SSB had to do was agree to siphon away the brand IP of Serta, Simmons, Beautyrest, and Tuft & Needle for the exclusive benefit of the Apollo-led creditor group.

While this would have provided strong, prioritized collateral for Apollo’s new loans, it would have left the other lenders hanging dry with the full amount of their original loans but with much less collateral. The newly formed subsidiary, rather than the original borrowing entity, would hold the valuable assets instead.

Granted, doing this dirty deal would have provided a temporary cash infusion to SSB, but would it ultimately have been worth the trouble? Not to mention, the new loans taken out by the subsidiary would lead to an overall increase in total debt load for the company.

Creditor-on-Creditor Violence

Apollo’s J. Crew maneuver against SSB could have and should have worked. But it was foiled by the other majority lenders (Eaton Vance, Invesco, Credit Suisse) with a counter-proposal to the company that pulled the rug out from under Apollo.

(If my own brand, Tuft & Needle, were not wrapped up in the middle of this, the utter absurdity may be kind of entertaining. But it is, so I must say it is all stupid games.)

Bloomberg’s Matt Levine shared an illustrative example of the judo move by Advent and Eaton Vance against Apollo:

1. A company borrows $1 billion, in a syndicated loan or a bond issue, from a bunch of different investors.

2. As is customary, the loan agreement or bond indenture says “this agreement may be amended by a majority of the investors.”

3. Time passes and the company runs into some trouble.

4. The company goes out to 51% of the investors — holders of $510 million of the bond or loan — and says: “Psst. We will pay you back 110 cents on the dollar — $561 million total — if you agree to let us stiff the other guys.”

5. So the 51% holders vote to amend the agreement to say “these holders will get 110 cents on the dollar, and the other holders will get zero.”

6. The other 49% are really mad and surprised.

7. The amendment works, 51% of the holders make a nice profit, 49% of the holders lose all their money, and the company pockets the extra $439 million.

Even though the initial exploit failed, Apollo was unwilling to accept defeat. This has now become a battle between heavy-hitting creditors. The stakes are high and the consequences of defeat could be catastrophic for the portfolio returns (and egos) of either side. In 2020, Apollo incited litigation still ongoing to this day, and as the tension reaches its climax in 2023 — with SSB now facing bankruptcy — it is yet unclear which side will emerge victorious.

Distressed debt investors have a fast-growing bag of tricks to take advantage of situations like this. It’s a bit of a cat-and-mouse game, where high-powered lawyers scour through creditor agreements and look for creative ways to activate new “trap doors”.

Once a trap door is used and publicized, though, it is pretty much burned since the lender community will patch future contracts. There’s already a ton of legal literature around “J. Crew blocker” provisions:

As we enter 2023 with a downturn economy, we will see an increased exploitation of loopholes in creditor agreements like this in the overall market. As a result, companies like SSB get squeezed for blood from all directions: from the dwindling economy and the company’s own cap table using the business as a battleground for control and profits.

“The best minds of my generation are thinking about how to make people click ads”, said Jeff Hammbacher, a Facebook engineer.  I think about this quote quite often because I have in the past lamented the fact that there is a misallocation of resources in the USA in particular due to the massive size of its banking and finance sector, and how payouts in that world completely dwarf that of public service, leaving government to third stringers and narcissists who like the public spotlight, whether it be negative or positive.  Why subject yourself to constant media scrutiny in a 24 hour news cycle when you can get 10 to 100+ times the pay working for BlackRock, with no one trying to peek through your windows or going through your online history?

To this day, mattress companies serve as some of the most desirable trading cards for the high-stakes investment community. At the top of the list, Simmons has changed hands 8 times as the most passed-around company in business history.

Over recent decades, leveraged buyouts prevailed as the proven playbook. Historically, the mattress business was a safe bet with this rare combination of characteristics: 

• A stable business model with little to no external competition

• Fragmented marketplace with continuous opportunities for consolidation

• Consumers of all ages and income levels are in the market

• Consistent, recurring purchase behavior every 8-10 years

• Relatively recession-proof

• High price points with healthy margins to satisfy everyone down the value chain

• Minimal reinvestment required for innovation and R&D

• Strong, predictable cash flows to prop up mega loads of debt

Although the role of private equity investors is controversial, they play a vital role in our ecosystem. When they show up, the companies take on a new life driven by profitability and consistent results. As illustrated by the philosopher Lucretius, aging and death are beneficial because they make room for the next generation.

To further illustrate private equity’s frenzy of activity in mattresses, here’s a timeline of events leading up to where we stand today. If I’m missing any details or there are any errors, let me know in a comment below.

1986

Simmons: Sold to Wesray Capital for $120 million, most of which was debt financed, in one of the earliest case studies of leveraged buyouts.

1989

Sealy: First Boston provides a bridge loan for Gibbons, Green, van Amerongen to acquire Sealy for $1.1 billion.

1990

Sealy: In the debacle that's become known as the "Burning Bed", Sealy's financing coincides with the collapse of the junk bond market. Unable to unload the loan on the markets, First Boston gets stuck with the entirety of the debt and ownership of Sealy. Later First Boston requires a bailout from Credit Suisse due to the collateral damage.

1991

Simmons: Sold to Merrill Lynch for $32 million, for a 60% ownership stake and assumption of debt.

1993

Sealy: Sold to Sam Zell in a fire sale for $250 million, less than a quarter of First Boston's valuation just a few years prior.

1996

Simmons: Sold to Investcorp, an investment group in Bahrain, for $265 million.

1997

Sealy: Sold to Bain Capital for $791 million, of which $650 was debt. Bain continues to increase Sealy's debt load to over $900 million.

1998

Simmons: Sold to Fenway Partners for $513 million.

2002

Tempur-Pedic: Sold to TA Associates and Friedman, Fleischer & Lowe for $350 million, financed with $205 million in debt.

Mattress Firm: Sold to Sun Capital.

2003

Tempur-Pedic: IPO.

Simmons: Sold to Thomas H. Lee Partners for $1.1 billion, financed with $745 million in bonds and bank loans.

Serta: Sold to Ares Management and the Ontario Teachers Pension Group.

2004

Sealy: Sold to Kohlberg Kravis Roberts for $1.5 billion, about a billion which is financed with debt. KKR continues to loads it up with more debt.

Hilding Anders of Sweden: Sold to Investcorp for 410 million EUR.

2005

Spring Air: Sold to HIG Capital and merged with American Bedding Industries.

2006

Sealy: IPO.

Mattress Giant: Sold to The Carlyle Group.

Hilding Anders: Sold to Candover for $1.3 billion.

2007

Simmons: Thomas H. Lee Partners creates a holding company to issue $300 million more in debt. Following this up with a $238 million dividend, THL recoups its $327 million equity investment and books a $48 million profit.

Mattress Firm: Sold to J.W. Childs for $450 million, financed with $210 million of debt.

2009

Simmons: Files for chapter 11 bankruptcy, and is sold to Ares Management and Ontario Teachers' Pension Plan for $760 million. The exit package slashes Simmons’ debt to $450 million from $1 billion. Ares and OTPP combine the corporate entities of Simmons and Serta under AOT Bedding Super Holdings.

2011

Mattress Firm: IPO.

2012

Sealy: Sold to Tempur-Pedic for $228 million.

Serta & Simmons: Combined entity sold to Advent International for $3 billion.

Mattress Giant: Sold to J.W. Childs by way of Mattress Firm.

2014

Sleep Train: Sold to J.W. Childs by way of Mattress Firm for $425 million.

2016

Serta & Simmons: Advent rebrands the combined entity as Serta Simmons Bedding (SSB) in preparation for IPO.

Sleepy's: Sold to J.W. Childs by way of Mattress Firm for $780 million.

Mattress Firm; Sold to Steinhoff of South Africa for $3.8 billion.

2018

Tuft & Needle: Sold to Advent and merged with Serta and Simmons under SSB.

Saatva: Sold to TZP Capital.

Mattress Firm: Files for chapter 11 bankruptcy following the accounting scandal of Steinhoff.

Serta: Advent combines Serta China with King Koil China, under the combined entity AI Dream.

2019

SSB: Apollo, Angelo Gordon and Gamut collectively buy a third of the $1.95 billion senior debt of SSB at a deep discount. Expecting a default, they approach Advent with an offer to lend additional capital to fund operations for SSB if the company pledges the intellectual property of its brands.

2021

Casper: Sold to Durational Capital for $286 million.

Brooklyn Bedding: Sold to Cerberus Capital and merged with Helix. The merger is financed by HIG Capital (WhiteHorse Finance).

Serta: Advent sells Serta China to Hillhouse Investment by way of AI Dream.

2022

Mattress Firm: Files for an IPO seeking to raise $100 million.

Purple: Takeover bid by Coliseum Capital.