Friday, September 28, 2012

Tempur-Pedic Buys, You Sell!

Earlier this year, shares of premium mattress maker Tempur-Pedic fell from a lofty $87 to just $20, at which point the stock was brought up on this site as a potential value investment. Yesterday, investors were offered the opportunity to sell these same shares for a 50% premium to the price on that day.

Tempur-Pedic shares have been slowly appreciating over the last few months, but rose as much as 20% yesterday alone (intraday) on the news that it has agreed to buy Sealy, a competing mattress maker. Usually, the market frowns on the buyer; but not this time. It appears the market believes Tempur-Pedic is getting a good price for Sealy's brands/products/customers. I don't know if that's true; it may be. But in executing this purchase, Tempur-Pedic is taking a good deal of risk.

Tempur-Pedic is only paying about $230 million for all of Sealy's shares, which equates to only about a year's worth of Tempur-Pedic's earnings. But Sealy owes a decent amount of debt, and as of late it hasn't shown the capacity to be able to pay this debt off. Tempur-Pedic will now have to assume this debt, bringing the debt of the combined company to around $1.5 billion. This is about 9 times the company's estimated earnings for this year (assuming no contribution from Sealy, which is barely breaking even).

It's possible that the combined company will benefit from synergies and scale, but it's no sure thing. The obligations the combined companies owe, however, are a sure thing.

As an aside, I'm not a fan of this merger as a competition-loving consumer. The combined firm would represent almost one-third of the US market by my rough calculations. (They each do about a billion in US sales, and the US market is perhaps about $7 billion large.) Though I'm no expert in anti-trust law, I'm not sure this deal is a complete slam-dunk from a regulatory point of view.

Tempur-Pedic was reasonably priced without a whole lot of risk two days ago. Today, thanks to an additional debt load it plans to take on, its risk-profile has risen considerably, even if it may have gotten cheaper. For that reason, I took my money and ran. Shareholders should be sure to understand the new risks before deciding to hang in there.

Disclosure: No position

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