Atlanta-based Serta Simmons Bedding and 13 affiliates filed for bankruptcy protection Monday. The mattress maker filed court documents in the Southern District of Texas. It is looking to cut its debt burden by nearly 85%, from $1.9 billion to $300 million.
Serta Simmons has obtained a $125 million debtor-in-possession loan to keep operating while under bankruptcy protection. Its restructuring plan includes an additional operating loan of $125 million once it emerges from bankruptcy.
This isn’t good news if you’re a stakeholder of Serta Simmons, but it is good news if you own Tempur Sealy International (TPX) stock. Here’s why.
The Mattress Market Is Full of Bankruptcies
Serta Simmons’ history together dates back to January 2010, when private equity investors Ares Management LLC and Teachers’ Private Capital acquired the Simmons Bedding Co. out of bankruptcy protection for $760 million.
The investor group already owned a majority position in Serta, which it acquired in August 2005. Serta’s existing owners at the time reinvested a portion of their proceeds into new equity, and its management team stayed on to run the bedding company.
Simmons’ bankruptcy plan included cutting its debt by 50% to $450 million. However, like many leveraged buyouts, Simmons was saddled with debt added to pay for private equity firm Thomas H. Lee’s acquisition of the bedding company in 2003.
Advent International is the current majority owner of the National Bedding Co., the holding company that owns Serta Simmons. It acquired majority control in 2012 for $3 billion. Ares Management and Teachers’ Private Capital retained a minority stake in the sale.
If you’ve followed the mattress business for any length, you’ll know that bankruptcies are a fact of life for this industry. So, it’s not surprising that Serta Simmons Bedding entered Chapter 11 in 2023.
Temper Sealy came to be in 2013 when Tempur-Pedic International acquired Sealy for $1.3 billion, including the assumption of debt. Sealy itself was acquired by Kohlberg Kravis Roberts & Co. in 2004 for $1.5 billion. The private equity firm took Sealy public in April 2006. The IPO at the time valued Sealy at a market cap of $1.45 billion.
So, over seven years, Sealy’s value declined by several hundred million dollars. That’s the nature of the mattress industry.
One big positive: Since Tempur-Pedic acquired Sealy, its shares have gained 241%, 71 percentage points higher than the S&P 500 over the same period.
Why Is Serta Simmons’ Bankruptcy Good News for TPX?
It’s a counter-intuitive thought because once Temper Sealy’s competitor emerges from bankruptcy, it will have a much stronger balance sheet, enabling Serta Simmons to reignite its growth.
According to FurnitureToday.com, Serta Simmons’ annual revenue in the 12 months ended June 30, 2022, was $2.2 billion. In the 12 months ended Sept. 30, 2022, Tempur Sealy’s revenue was $5.1 billion, more than double its most significant competitor.
In 2019’s fourth quarter, Tempur Sealy’s feud with Mattress Firm, one of America’s largest mattress retailers, ended with the retailer restocking Tempur Sealy products. This came a year after Mattress Firm itself entered bankruptcy protection.
It’s important to note that Tempur Sealy has been a public company for 19 years. It did an IPO in December 2003. So it will hit its 20th anniversary at the end of this year without going bankrupt. That’s a big deal for this industry.
So why is Serta Simmons’ bankruptcy good news?
After emerging from bankruptcy, Serta Simmons will do what mattress firms always seem to do: it will generate momentum through higher sales and minimal profits, going public as soon as the IPO markets are healthy again.
Serta Simmons couldn’t have picked a more opportune time to enter bankruptcy protection. When it emerges, a recession could be in the rearview mirror or a non-starter through a soft landing.
The current interest rate environment is an excellent time to get one’s house in order.
However, the downside is that the latest bankruptcy filing reminds furniture and mattress retailers that there’s only one firm to deal with over the long haul, and that’s Tempur Sealy.
According to IBISWorld, Tempur Sealy has a market share of 38% in the U.S., making it the largest manufacturer by revenue.
Between December 2015 and December 2022, Tempur Sealy grew its revenue by 7%, compounded annually to $5.1 billion. At the same time, it increased its adjusted earnings per share by 20% compounded annually. So, it’s doubling its EPS every five years or so.
This explains why the nine analysts covering TPX, according to Barchart.com, rate it a Strong Buy.
If you own TPX stock, yesterday’s news is good for the long-term trajectory of its stock. And if you don’t, you might want to take this opportunity to consider investing in a business whose products are preferred by most American consumers.
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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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