Mattress Firm: When a Buyout Vindicates a Highly Debated Business Model

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Mattress Firm Holding Corp. (NASDAQ: MFRM) has had many critics, and the company has seen more than its share volatility as it has aimed to create a dominant position in the retail mattress sales market. Now the company is being acquired by a foreign company for a massive premium that more than doubled the price. This merger is also crushing the short sellers, of which there were many. More importantly, this deal will vindicate a company’s questionable business model.

The nation’s largest mattress retailer is being acquired by Steinhoff International Holdings. The deal will value Mattress Firm at $64 per share in cash, a whopping 115% premium Friday’s closing stock of $29.74. The full deal values Mattress Firm at approximately $2.4 billion, but the enterprise value (including debt) will be roughly $3.8 billion.

The company’s press release indicated that this merger will create the world’s largest multi-brand mattress retail distribution network. The acquisition was approved by the boards of both companies and is projected to close by the end of the third calendar quarter. One key issue to consider here is that the transaction is not subject to any financing condition.

Steve Stagner, who is executive chairman of Mattress Firm, and Ken Murphy, who is its president and chief executive officer, will be remaining in their positions.

24/7 Wall St. would point out just how bad this merger is going to be for a multitude of short sellers. Mattress Firm’s short interest was 6.8 million shares as of July 15. That represented some 40 days to cover, versus the 167,000 or so shares on an average day’s trading volume. Short sellers had been quite vocal against this company’s business model for some time. All that noise from the short sellers is simply being met with severe pain on the reaction.

Two different comments were made by management. Perhaps all that really needed to be said was “We are selling the company as a whole at close to all-time highs from two-years ago.”

One of the biggest issues here is that the Mattress Firm acquisition will perhaps thwart much of the criticism. This company had many stores located around major cities, some of which analysts pointed that were so close to other stores that they were cannibalizing each other’s sales. That being said, the company has grown to dominate some regional mattress company sales for standalone bedding and mattress retailers. This is a business that still remains highly fragmented with many regional players.

Stagner said of the deal:

The Mattress Firm board believes that the transaction provides significant value to our stockholders through the premium to our share price and the immediate liquidity at closing, while giving Mattress Firm an ideal partner with a proven track record in the complete mattress supply chain including the retail and manufacture of mattresses. This expertise will complement our diverse selection of products provided by our valuable partners. Steinhoff’s management team shares our vision for the growth and expansion of Mattress Firm and, as such, we believe they are the right long-term partner for our customers, employees, suppliers and other stakeholders.

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Murphy said:

Today’s announcement marks an exciting new chapter for Mattress Firm that will open up future opportunities for our employees, our customers and our business partners. We remain focused on our long-term strategy to build a national chain under one banner in the U.S. and we will continue activating and unlocking the true power of all of the assets we have assembled to truly become the preferred choice for better sleep.

Mattress Firm shares were last seen trading up 114% at $63.70 on more than 4.5 million shares after about an hour of trading. Keep in mind that the consensus analyst price target was $35.88 ahead of the deal, versus a prior $29.74 closing price.