Fenway Auction For Simmons Heats Up –

When Fenway Partners decided in August to put mattress maker Simmons Co. up for sale, the firm knew it would receive a positive response. Several weeks later, positive has turned into downright aggressive, as some of the biggest names in the LBO market are bidding for the company. When all is said and done, market pros say the purchase price will soar past $1 billion, with the debt package alone more than double what Fenway forked over for the bed maker just five years ago.

Goldman Sachs is running the auction, and has enlisted the help of UBS and Wachovia to manage a who’s who list of bidders, which includes Credit Suisse First Boston, Freeman, Forstmann & Little, Kohlberg Kravis Roberts & Co., Madison Dearborn Partners and Thomas H. Lee. Published reports have The Carlyle Group as a bidder, but a source at the firm said, “We recieved the book, but never made an offer.”

The appetite for the deal isn’t surprising considering that a source close to the action said Simmons has greatly improved free cash flow, nearly doubling it to a 2004 projected total of $69 million, which should aid in debt repayments.

Atlanta-based Simmons is the second-largest bedding manufacturer in the U.S., behind Bain Capital-controlled Sealy Corp., and supplies more than 10,000 retail outlets. Most importantly, Simmons has the top market position in the premium segment of this $4.8 billion market. This year, approximately 50% of Simmons’ sales come from its high end bedding, which sells for a retail price more than $800.

Simmons’ revenue in 2002 was $670 million with EBITDA topping $99 million, and the company predicts 2003 earnings and revenue to exceed $793 million and $123 million, respectively. Gross sales will top $850 million in 2003, according to the source.

Times have certainly changed since Fenway purchased Simmons from Investcorp in October 1998 for $483 million. Back then, with the financing market tightening, and banks unwilling to offer substantial bridge loans, Investcorp allowed Fenway to haggle the price down from $500 million. Fenway made concessions too, eliminating the MAC (material adverse change) clauses and increasing its equity portion and adding more senior debt in lieu of the dwindling bridge loan.

A source close to the Fenway sale said Goldman, UBS and Wachovia, already debt holders from the Fenway-Investcorp deal, lead the debt portion, which at about $1 billion is roughly 10 times EBITDA. The financing package will likely be extremely debt-heavy. And remember that problem Fenway and Investcorp had with the bridge loan back in 1998? That deal saw its bridge loan cut from $180 million to $75 million, but this time around, the banks have approved a bridge loan of up to $275 million, according to the source. Also included within the debt package, once the deal is sealed, are senior notes of approximately $500 million and junk bonds totaling $275 million.

No one will argue that the mattress manufacturing industry has been lying around all day on its own products, as the sector has seen an average of 6% growth-without a single year of declining revenues-during the past 20 years.

With steady growth in a mature industry, the bedding sector is anything but a sleepy segment of U.S. manufacturing. And LBO shops know this. Tempur World, another mattress maker, is owned by TA Associates and Friedman, Fleischer & Lowe, and recently filed for a $300 million IPO.

Investcorp is still in bed with the sector, as owners of Aero Products. Investcorp purchased Aero from rival buyout shop Trivest in November 2002 for $231.5 million, nearly three times what Trivest paid just 17 months earlier (see Buyouts, 11/02/2002).