Sleep Soundly
Invested Banker to the Consumer Industry
Description
TARGET: Sleep Innovations, Inc.
COUNTERPARTY: Sun Capital Partners V, L.P.
SEGMENT: Home & Auto
TRANSACTION VALUE: Undisclosed
CLOSING DATE: November 16, 2012
ROLE: Exclusive Financial Advisor

Founded in 1996, Sleep Innovations is a fast-growing, vertically integrated manufacturer and marketer of a wide range of innovative comfort, relaxation and rejuvenation products, for both the retail and original equipment manufacturer (OEM) markets.

“The team from Sawaya Partners surpassed our expectations of professionalism, negotiating skill, and insight throughout the extended sale process. Despite the obstacles posed by a difficult market and skittish buyers, Sawaya Partners helped our Board conclude a transaction representing great value to our shareholders.”

DIANE BAKER CHAIRWOMAN OF THE BOARD, SLEEP INNOVATIONS, INC.

The Company manufactures and markets memory foam products based on proprietary polyurethane foam technology. The Company’s products include mattresses, mattress toppers, pillows, and specialty products, which are sold in leading U.S. retailers including Costco, Kohl’s, Sam’s Club and Amazon.com. Through its Advanced Urethane Technologies division, Sleep Innovations also produces polyurethane foam-based fabricated components and bulk materials sold to OEM fabricators serving the bedding, furniture, automotive, marine, medical and packaging markets. A selection of the Company’s products is highlighted below.

In 2008, the Company encountered a “perfect storm” created by the combination of skyrocketing raw materials costs, driven by a spike in oil prices, and a sharp decline in consumer spending as the U.S. economy slid into the Great Recession. As a result, the Company was forced to file for protection under Chapter 11 of the U.S. Bankruptcy Code in October 2008. As part of the Chapter 11 process, the Company’s lending group was granted majority ownership in the reorganized Sleep Innovations in exchange for forgiving a substantial portion of their indebtedness. In addition, a new Board of Directors was elected and a new management team was installed, under the leadership of CEO Michael Thompson and CFO Stuart Stoller.

Following its emergence from bankruptcy in March 2009, the Company implemented a number of operational initiatives as part of its 3 Year Strategic Plan which resulted in (i) a substantial increase in the number and quality of new product introductions, (ii) an overall reduction in operating costs by approximately $25 million, and (iii) an increase in revenues by approximately 50%. By 2011, the Company increased its EBITDA by over 3x. As a result of the Company’s strong financial performance, the Board of Directors decided in late 2011 to engage an investment banking firm to explore a sale of the Company.

Sawaya Partners was engaged as the Company’s exclusive financial advisor after the Board met with a number of bulge bracket and boutique investment banks. Sawaya Partners was chosen for its ability to convincingly position Sleep Innovations as an innovative consumer products company, its relationships and access to strategic and financial buyers, its reputation for providing the highest quality advice, and its proven track record of achieving superior outcomes for its clients.

The Board of Directors’ goal throughout the process was to ensure the completion of a transaction at an attractive valuation. To accomplish this goal, several parameters were established:

  • Protect the Company’s competitive position by targeting the highest quality candidates within the universe of potential buyers that represent the best strategic fit with the Company
  • Maximize certainty to close by vetting potential buyers for their ability to close a transaction with limited financing risk
  • Maximize shareholder value by effectively presenting all of the key value drivers of the Company
  • Find the ideal partner that would value the Company’s growth prospects and would be prepared to invest in the Company’s future
  • Limit future obligations of current shareholders by maximizing cash at close and limiting post-closing liabilities of the diverse shareholder base


Industry Dynamics:
The bedding market underwent a number of dramatic shifts leading up to and during the Sleep Innovations sale process. First, during 2008 and 2009 the bedding industry suffered its biggest declines (over 17%) in over 30 years as a result of the housing crisis during those years. The industry emerged from the recession in 2012 with consumers continuing their long-term shift towards purchasing specialty products (memory foam and air) at the expense of traditional innerspring mattresses. While specialty products had historically been priced at a substantial premium, consumers began to seek specialty products that delivered premium benefits at a value-oriented price. Sleep Innovations and Serta benefited from this trend by introducing value-priced gel memory foam mattresses, while Tempur-Pedic suffered sales and stock market declines as consumers shifted away from its premium-priced products. These trends were the impetus for two significant M&A transactions in the industry – Serta/Simmons’ sale to Advent International in August 2012 and Tempur-Pedic’s acquisition of Sealy in September 2012.

Company Positioning:
Sleep Innovations was ideally positioned to capitalize on the industry trends highlighted above. As an innovative, value-priced, specialty products manufacturer, Sleep Innovations delivered products that were in line with consumers’ evolving preferences. With its focus on big box retailers, Sleep Innovations also had a unique channel strategy relative to traditional bedding manufacturers. In addition, the Company’s OEM division was able to capitalize on the evolving needs of traditional bedding manufacturers by supplying them with innovative specialty products. Potential buyers were impressed with the unique selling points of the Company, highlighted below.

The Company solicited and received offers from multiple strategic and financial buyers. Sawaya Partners and the Board thoughtfully explored each transaction proposal, which ultimately resulted in the consummation of a deal with an affiliate of Sun Capital Partners, a leading private investment firm. Sun Capital’s (i) strong financial capabilities paired with (ii) its deep experience in the bedding market (most notably with bedding products retailer Mattress Firm), (iii) ability to consummate a transaction quickly and with limited risks to the sellers, and (iv) favorable valuation, made the firm an ideal buyer for Sleep Innovations. Additionally, Sawaya Partners recommended the use of representations and warranty insurance, which allowed the existing shareholders to maximize their cash at close, and mitigate their financial and legal obligations in the future.

Sun Capital is an ideal partner for Sleep Innovations given its industry experience, sourcing benefits derived from its sizable portfolio of companies, and its shared vision for the continued growth of Sleep Innovations. The two parties have already begun put into place key initiatives for continued growth, which may include facility upgrades, geographic expansion and an acquisition strategy.

  • Kaz and Braun signed a 5-year strategic partnership under which Kaz acquired Braun’s Thermoscan line of infrared thermometers and the VitalScan/Sensor Control line of oscillometric blood pressure monitors. The transaction also included the pre-existing professional distribution arrangement with Welch Allyn, under which Braun’s Thermoscan products are marketed to physician’s offices throughout North America.
  • Under the terms of a multi-year supply agreement, the Braun organization agreed to manufacture the highly engineered devices and to assist Kaz in the manufacturing transition.
  • Importantly, the transaction includes a landmark trademark license agreement the terms of which allow Kaz to market these two product lines under the well recognized Braun brand on an exclusive basis worldwide. This is the first time Braun has ever agreed to a license agreement of this scope.
  • Finally, the transaction added approximately $100 million in worldwide sales for the acquired product lines.


Prior to the transaction, Kaz was the U.S. market leader in digital thermometers, and with the addition of Braun Thermoscan, it became the worldwide thermometer leader

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