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Mattress makers Tempur-Pedic and Sealy become bedfellows

Georgina Palmer/iStockphoto

Two icons of the sleep business have decided to become bed mates.

Tempur-Pedic International, known for its pressure-absorbing foam mattresses, is offering to buy traditional coil-spring mattress maker Sealy Corp., in a $1.3-billion (U.S.) deal.

The high profile takeover will focus more attention on the wakening interest among investors in what was once one of the more obscure corners of the consumer products business.

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In recent years, the mundane mattress business has been transformed as companies devise ever more exotic and expensive combinations of foams, gels and springs, all purporting to offer a better night's sleep, or what the industry has taken to calling "sleep solutions."

Sealy, which has been around for 131 years, has tried to capitalize on some of that sleep-inducing feeling through its whimsically chosen stock symbol, "ZZ."

But the job of providing a comfortable slumber is now serious business for many giant institutional investors.

Among the heavyweights that have felt the attraction of the mattress is Wall Street titan Kohlberg Kravis Roberts & Co., which owns 44 per cent of Sealy.

Even Ontario school teachers have a stake in the success of quirky new mattress introductions. The Ontario Teachers' Pension Plan has a position in AOT Bedding Super Holdings, which through various corporate entities owns the Serta and Simmons brands.

A spokesperson for Teachers says mattress makers are a great investment because they offer good returns and rely on a product that is constantly in need of replacement. "In a nutshell, the industry offers some attractive fundamentals, such as the replacement nature of the product, and the generation of cash flow," says spokesperson Deborah Allan.

Investors applauded the idea of two major mattress makers hitching up, and sent Tempur shares soaring $3.86 or 14.4 per cent to $30.64 on Thursday.

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Tempur is offering to buy Sealy for $2.20 a share, a 23 per cent premium to average prices over the past 30 days. The stock traded as high as $2.27 during the session, suggesting some investors believe there is a possibility of a competing bid.

Many of the institutions that have invested in the mattress business are private equity firms such as Kohlberg Kravis Roberts, which specialize in spotting attractive opportunities, taking companies private and using various tactics, including large amounts of debt, to improve their returns. Given that these supposedly sharp private investors can't keep their hands off mattress makers, there might be a reason for ordinary investors to take a look at the sector too.

But if the takeover succeeds, there won't be much choice. Other than Tempur, only one other big publicly traded mattress maker, Select Comfort Corp., will remain on the U.S. market.

One allure of mattress making is that that the business is not vulnerable to cheap, foreign imports because it's too expensive to ship the bulky product from low wage countries, such as China.

Ryan Trainer, president of the International Sleep Products Association, a Virginia-based trade group, estimates that more than 90 per cent of Canadians and Americans sleep each night on domestically made mattresses.

In the aftermath of the Great Recession, mattress sales in the U.S. fell by 20 per cent, but have started to come back as the economy rebounds.

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Mattresses may now be a way to play the U.S. housing rebound. Mr. Trainer says Americans typically buy new mattresses when they move, and as home sales pick up, demand for the product is returning "slowly but surely."

However, mattress making isn't all sleepy comfort for investors. Kohlberg Kravis Roberts loaded Sealy with debt, which eroded the company's returns when sales slumped and made the stock highly volatile. The shares traded as high as $17.90 in 2007 before the crash. They reached penny stock status – a low of only 55 cents – in early 2009, before recovering.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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