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Money Under the Mattress
A look back at private equity's symbiotic relationship with the mattress industry.
The mattress industry would not exist without private equity. It's been a love-hate relationship since the 80’s when the boom of junk bonds ignited a revolution in financial engineering. Since then, the brightest minds graduating from elite universities have been clamoring to create and extract the highest value in an otherwise sleepy industry.
“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
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.
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Simmons: Sold to Wesray Capital for $120 million, most of which was debt financed, in one of the earliest case studies of leveraged buyouts.
Sealy: First Boston provides a bridge loan for Gibbons, Green, van Amerongen to acquire Sealy for $1.1 billion.
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.
Simmons: Sold to Merrill Lynch for $32 million, for a 60% ownership stake and assumption of debt.
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.
Simmons: Sold to Investcorp, an investment group in Bahrain, for $265 million.
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.
Simmons: Sold to Fenway Partners for $513 million.
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.
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.
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.
Spring Air: Sold to HIG Capital and merged with American Bedding Industries.
Mattress Giant: Sold to The Carlyle Group.
Hilding Anders: Sold to Candover for $1.3 billion.
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.
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.
Mattress Firm: IPO.
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.
Sleep Train: Sold to J.W. Childs by way of Mattress Firm for $425 million.
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.
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.
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.
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.
Mattress Firm: Files for an IPO seeking to raise $100 million.
Purple: Takeover bid by Coliseum Capital.
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