Toronto-based holding company Fairfax closed a $1.7 billion deal over the weekend to acquire mattress and sleep accessories retailer Sleep Country.
Representing a 28% premium to the stock price recorded at the close of trading on Friday, the $35 per share offer proposed by Fairfax and accepted by the retailer’s board of directors is considered opportunistic by analyst Martin Landry of the firm Stifel/GMP.
“The company has a leading position in the Canadian mattress industry, with an estimated 40% market share. It is well established, which gives it negotiating power with mattress manufacturers. This translates into profitability that is well above that of other North American retailers in the sector. These characteristics justify a higher valuation multiple than recent transactions observed in the industry.”
At first glance, the price offered by Fairfax therefore appears lower than what Martin Landry could have expected. He nevertheless believes that shareholders will support the transaction given the “low” probability of other offers and the certainty of benefiting from an improved value.
Given the stock’s declining market price — it was trading at more than $40 less than three years ago and closed last week at $27.28 in Toronto — Landry believes the company has had several discussions with private equity firms over the past few years. “Those discussions most likely informed and guided the board and the special committee in their evaluation of the Fairfax offer,” he says.
According to him, there are only a limited number of strategic players capable and interested in acquiring the company.
“Tempur Sealy is the obvious strategic player that comes to mind. However, the timing is not ideal for Tempur Sealy, as it faces antitrust concerns in its efforts to complete its acquisition of Mattress Firm.”
The stock rose above $35 on the Toronto Stock Exchange during trading on Monday, suggesting that some investors are anticipating a competing offer, perhaps from another financial player.
Martin Landry also said he understood that the proposed transaction was not the result of a sales process launched by management, but rather the fruit of a one-off offer by Fairfax.
In a note sent to clients Monday, RBC analyst Tom Callaghan said he viewed the proposed acquisition presented Monday as an affirmation of the brand’s “strong position” in the market as Canada’s leading mattress retailer.
For the transaction to proceed, Fairfax’s offer must obtain the support of at least 66 2/3% of the votes cast by holders of common shares.
“This transaction clearly demonstrates the value and strength of our brands and our organization,” said Stewart Schaefer, chairman and CEO of Sleep Country/Dormez-vous, in a press release.
“We look forward to working with Stewart and the entire Sleep Country team to continue the long-term development of this remarkable Canadian success story,” said Fairfax CEO Prem Watsa.
A termination fee of $36.5 million is payable to Fairfax by the company if the agreement is terminated “in certain circumstances.”
The company has 19 warehouses and 304 stores across the country (60 in Quebec).