Tempur-Pedic International (TPX) Acquires Sealy (ZZ) and Dilutes High-End Mattress Niche Strategy

February 20, 2013

Tempur-Pedic International (TPX) diluted its luxury-mattress strategy through the acquisition of Sealy Corporation (ZZ) when competition in the space became fiercer, prompting Michael McCloskey, President and Founder of GreensKeeper Asset Management Inc., to sell the stock in the $30s despite the investor community’s general approval of the purchase.

“What we loved about Tempur-Pedic was its profitable niche,” McCloskey said. “They panicked by making the Sealy acquisition, and they paid $1.3 billion — including debt — for a mediocre business. To us, that was an example of a great business run by a mediocre management team, so we were happy to take our 35% gain.”

McCloskey says TPX displayed poor judgment by jumping into the lower end of the mattress business. He says the company has a great brand and very efficient manufacturing capabilities, and even though the company’s balance sheet was in good shape, these reasons don’t justify his holding the stock.

“The acquisition, in our opinion, was a bad capital-allocation decision by management. Sealy, for the last three years, has not made money. Their sales are increasing because of the improving U.S. housing sector and the economy. Sealy is likely to sell additional mattresses over the coming years, but again, they’re not making any money. It’s a very low-margin business,” McCloskey said.

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