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Purple Innovation Soared 20% on Intellibed Deal Before Crashing Back Down, Why Though?

On the 1st of September, mattress and pillow manufacturer Purple Innovation (US:PRPL) announced the acquisition of Advanced Comfort Technologies Inc, which is commonly known under the brand “Intellibed”.

News of the acquisition pushed PRPL’s stock up over 20% with the stock climbing above $3.40 by the close of Thursday’s trading. However in the days following, the gains were sharply erased with the stock now trading -7% lower in total since the news release.

Why the sudden sell-off? Was the market overly upbeat by Purples CEO outlook commentary?

Intellibed is a premium luxury gel-based mattress manufacturer that scientifically designed a bedding product for maximum back support, spinal alignment and pressure point relief.

Under the merger agreement, Purple Innovation will issue 8 million shares as consideration for the transaction with a potential further 1.5 million shares that may be issued to Intellibed’s owners depending on PRPL’s share price movements over the next 18 months.

The initial consideration values the transaction at ~$21.3 million, based on a closing price of $2.66 on Tuesday evening.

Purples management discussed in the press release that Intellibed generated about $50 million of revenue in 2021 and has a product line that is highly complementary to PRPL’s current offering. The increased sales are expected to grow PRPL’s FY22 revenue by just under 10% once incorporated.

The transaction is expected to be non-dilutive to PRPL’s earnings per share (EPS).

Purples CEO Rob DeMartini stated “Intellibed is an excellent fit for Purple” as the company has already licensed specific aspects of the gel technologies for years, which will allow PRPL to consolidate its IP and manufacturing capabilities.

More importantly, DeMartini highlighted that the deal allows Purple to accelerate its product development schedule by several years and immediately address the more luxury, higher-margin segment of the sleep and wellness industry”.

Fintel platform research pointed out a sharp change in options sentiment for the stock following the release of the announcement. This was explained by the put/call ratio spiking from below 0.25 to above 0.45 in a matter of days.

This ratio is calculated by assessing all disclosed open put and call interest in the market for a specific stock. A ratio skewed towards 0 suggests bullish sentiment exists in the stock with call option volume outweighing put option volume, while a number above 1 would indicate put volumes are larger than call volumes.

This ratio is depicted in the chart to the right which shows the options sentiment  trends against the share price over the previous 6 months.

Atul Maheswari from UBS notes that the Intellibed acquisition presents growth potential but he questions if the category is already saturated. Atul sees both defensive and offensive capabilities arising from the transaction as PRPL did acquire the only competitor of scale in a niche bedding category but sees potential revenue synergies. UBS remains ‘neutral’ rated on the stock with a firm $4 price target following the transaction.

Bradley Thomas from KeyBanc Capital Markets, views the acquisition as a positive move as PRPL moves up the value chain and expands its market share. Thomas believes the transaction will benefit the group’s margins as a flow on effect from higher Intellibeds higher prices. Despite the headwinds that continue to impact the sector, KeyBanc remains ‘overweight’ rated with a $10 price target.

On average across the street, PRPL holds an ‘overweight’ rating and consensus target price of $5.11, suggesting about 90% capital upside from the current price. This consensus target however has fallen significantly with the share price over the last year.

This article originally appeared on Fintel

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