Mattress Firm (MFRM) Completes The Sleep Train Acquisition; Enters $125M Revolver

Mattress Firm (Nasdaq: MFRM) announced the completion of its acquisition of all of the outstanding equity interests in The Sleep Train, Inc., (“Sleep Train”), the leading West Coast based bedding specialty retailer, for an aggregate purchase price of $425 million, subject to working capital and other customary adjustments, along with the assumption of certain additional liabilities totaling approximately $15 million. The Company expects to receive future annual cash income tax benefits of approximately $11 million over the next 15 years from deductible tax basis goodwill generated from the transaction, subject to the Company’s ability to generate future taxable income. Sleep Train operates approximately 310 specialty mattress retail stores located in California, Oregon, Washington, Idaho, Nevada and Hawaii, and reported net sales of approximately $471 million for the 2013 fiscal year.

The Company also announced today that it entered into a new senior secured credit facility with Barclays Bank PLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, and UBS Securities LLC, as joint bookrunning managers and joint lead arrangers. The senior secured credit facility is comprised of (i) an asset based revolver of $125 million that includes a sublimit for letters of credit and swingline loans, subject to certain conditions and limits and (ii) a term loan B borrowing of $720 million. Approximately $49 million of proceeds were drawn under the asset based revolver at closing. The asset based revolving loan will mature on the fifth anniversary of the closing, and the term loan B borrowing will mature on the seventh anniversary of the closing. The Company’s existing credit facility, including its outstanding term loan borrowing, was terminated upon the closing of the transaction.

“We are ecstatic to reach this milestone in our Company’s growth and couldn’t be happier about our future together,” stated Steve Stagner, Mattress Firm’s president and chief executive officer. “With the Sleep Train business, we become the first border to border, coast to coast multi-brand mattress specialty retailer in the United States, with pro forma sales of approximately $2 billion a year. We believe that our combined expertise will allow us to generate significant benefits for our stakeholders in the future. We are highly focused on integrating the two businesses and providing as seamless a transition as possible for all of our employees, customers and other stakeholders.”

Effective today, Dale Carlsen, the chief executive officer of Sleep Train, becomes president and chief strategy officer of the Company and will join the Mattress Firm Board of Directors as Vice Chairman. Rob Killgore, chief operating officer of Sleep Train, becomes co-chief operating officer of the Company along with current Mattress Firm chief operating officer, Ken Murphy. Ron Mittelstaedt, who currently serves as the chairman and chief executive officer of Waste Connections, Inc. (WCN), also joins the Mattress Firm Board of Directors effective with the closing of the acquisition. The Company will maintain a West Coast corporate headquarters near Sacramento, California.

Carlsen commented: “This transaction is the culmination of nearly 30 years of hard work by the Sleep Train family of employees and the beginning of the next chapter in our phase of growth. I look forward to bringing our two teams together for the benefit of our customers, our employees and the communities we serve.”

Compelling Strategic Rationale

Expands footprint into the West Coast, including key strategic markets

Adds over 310 retail store locations in major markets in California, Washington, Oregon, Nevada, Idaho and Hawaii from a leading market share player with limited overlap.
Provides customers with great value, convenience and choice.

Fortifies Mattress Firm as the leading mattress specialty retailer in the United States

Pro forma sales of approximately $2 billion annually and total enterprise locations exceeding 2,000 retail stores.

Generates significant synergistic opportunities

Over $20 million of identifiable cost and revenue synergy potential by fiscal year 2017.

Creates opportunity to begin leveraging national scale benefits

Allows for enhanced nationwide delivery and distribution, advertising efficiencies and exclusive partnership opportunities.

Adds high-volume, established locations with a strong and experienced leadership team

29 year history of well-positioned, long-term leases in “hard to enter” trade areas.
Immediate scale with a sustained and profitable multi-brand organization.
Experienced and disciplined culture that is highly aligned with Mattress Firm.

Enhances financial performance and improves growth prospects

Estimated to achieve mid-single digit earnings per diluted share (EPS) percentage accretion, on a generally accepted accounting principles basis before one-time costs, in fiscal year 2015.
Combined business is anticipated to generate significant free cash flow.
Establishes a foundation to execute on our proven relative market share model by opening additional stores in West Coast markets to achieve store penetration levels commensurate with existing Mattress Firm markets.

The Company intends to provide updated guidance for the combined company when it releases third quarter 2014 earnings in early December.

Barclays, Inc. acted as exclusive financial advisor to Mattress Firm. Norton Rose Fulbright acted as legal counsel to Mattress Firm in connection with the transaction. Prairie Capital Advisors, Inc. provided a fairness opinion to the trustee of The Sleep Train, Inc. Employee Stock Ownership Plan in connection with the transaction. Shartsis Friese LLP acted as legal counsel to Sleep Train in connection with the transaction.

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