Fri 08/17/2018 06:10 AM
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Evercore is broadly advising mattress-maker Serta Simmons Bedding as the company evaluates various options to address uncertainty surrounding the financial health of its largest customer Mattress Firm, according to sources. The sources add that Serta’s concerns have developed in light of recent reports of a potential Mattress Firm bankruptcy, and Evercore is assisting the supplier in evaluating the impact that further operational decline of Mattress Firm - or a Mattress Firm bankruptcy - could have on the vendor.

As reported previously, Mattress Firm, a subsidiary of South Africa-based Steinhoff International Holdings NV, has engaged Guggenheim Securities and Sidley Austin as it considers in and out-of court restructuring options. Steinhoff bought Mattress Firm for $3.8 billion in August 2016, or 11.1x 2016 forecasted EBITDA.

About a year after the Steinhoff acquisition, Mattress Firm received formal termination notices from its former largest supplier Tempur Sealy for all contracts with the company and, two months later in March 2017, announced a five-year initial strategic partnership with Serta Simmons. The companies disclosed with their announcement that Mattress Firm and Serta would be making a joint $100 million incremental advertising investment to span 18 months in conjunction with their launch of “new and exclusive products” in order to drive “consumer awareness and interest.” The supplier change has “resulted in gaps in the product range,” Mattress Firm said in its first-quarter earnings, which also disclosed that the company was seeking to “urgently” address those issues.

Serta’s capital structure is below:

Mattress Firm’s debt was refinanced as part of Steinhoff’s recent restructuring involving several of its entities, including Stripes US Holding Incorporated, or SUSHI, which holds the company’s Mattress Firm interests. Following creditor accession, a restructuring lockup agreement between Steinhoff Europe, Steinhoff Finance and SUSHI went effective last month. Parties now are seeking to implement within three months the restructuring, which pushes out debt maturities by three years. Under the restructuring agreement, Steinhoff Europe creditors have a first lien over 100% of shares in SUSHI, and any asset disposal process by SUSHI that is “initiated at the discretion of the board of [the new holding company that will sit above Steinhoff Mobel, which in turn will own Stripes US Holding, Mattress Firm’s parent].”

The restructuring calls for creditors to receive first and second lien 10% PIK takeback paper. Disposal proceeds, according to the lockup agreement, are to be applied according to a prespecified waterfall that has first lien PIK interest being paid first, followed by first lien primary obligations, second lien PIK interest, and second lien primary obligations. SUSHI debt being restructured includes a €406 million acquisition facility. Steinhoff’s implementation steps in the lockup agreement contemplate transferring SUSHI shares to Mobel, either of the new holdcos that would sit directly above Mobel, Steinhoff Europe AG, or the new Steinhoff Europe AG HoldCo.

There could be an amendment seeking to either amend and restate the acquisition facility with a Steinhoff Europe and ParentCo deferred guarantee, or exchange it into a new Steinhoff Europe term loan with a SUSHI and ParentCo deferred guarantee, according to disclosures related to the transaction.

Mattress Firm’s earnings for the six months ended March 31 showed “significant near-term operational disruptions” due to the rebranding of more than 1,300 stores and underperforming product transitions after Mattress Firm exited its supply agreement with Tempur-Sealy, leading to a 17% decline of revenue to €1.255 billion, according to Steinhoff’s half-year report released in June. Similarly, EBITDA for the period was negative €94 million, compared with negative €33 million in the same period a year earlier. The report noted that “margin pressure was due to uneconomic promotional price points and additional sourcing costs,” both of which the company says are being addressed.

Representatives for Serta and Mattress Firm did not immediately respond to requests for comment and Evercore declined to comment for this story.
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