Steinhoff hoping for a soft landing with Mattress Firm bid
STEINHOFF International’s bid of $3.8-billion (about R51-billion) for Mattress Firm Holding, the US’s largest bedding company, is the second significant transaction by the group in three months, although this week’s deal is much larger and in a region where Steinhoff has not yet tested its mettle.
The deal will further entrench the global household goods and furniture retailer in the mass discount market, and confirms the global ambitions of Steinhoff International CEO Markus Jooste, who has long been an admirer of Ikea, the world’s biggest furniture maker. Ikea has had organic growth, whereas Steinhoff has grown through acquisitions.
The pure “retail” aspect of the deal was likely to attract investors, as was the fact that bedding was generally less cyclical than furniture, said Shane Watkins, chief investment officer of All Weather Capital. “In bedding retail, efficient logistics is key and this is an area where Steinhoff has historically been very good.”
Watkins said the recent Poundland bid, if successful, would fundamentally transform Steinhoff’s Pep Stores business in Europe. “Pep are very close to 100 outlets and Poundland will double this number of stores, giving them an unrivalled footprint in fastmoving consumer goods.
“Margins in fast-moving consumer goods are low and scale and efficiency are key. They appear to have acquired Poundland relatively cheaply, taking advantage of the uncertainty in the UK post-Brexit. Also, their cash sits in euros, so buying OPPORTUNISTS: Steinhoff International CEO Markus Jooste, left, and chairman Christo Wiese ‘buy when others are fearful’ assets in the UK is automatically 11% cheaper,” said Watkins.
“Christo [Wiese, Steinhoff chairman] and Markus are opportunists and this is a deal that typifies their approach — buy when others are fearful, provided you can finance cheaply. Steinhoff are taking advantage of extremely low global interest rates to leverage up and make scale acquisitions.”
The South African-founded group owns Britain’s Bensons for Beds and France’s Conforama. The transaction will create the world’s largest multibrand mattress retail distribution network. Mattress Firm Holding operates 3 500 retail stores in 48 US states under Sleepy’s and Mattress Firm brands.
Charles Allen of Bloomberg Intelligence said the bid arguably kept Steinhoff’s focus on beds and mattresses, a core category. “The other bids that it has attempted in 2016 have suggested more diversification.”
The cash offer price of $64 a share would see Steinhoff paying a 115% premium to Mattress Firm’s closing share price last Friday. Some market watchers question whether this signals a change from the strict financial discipline shown by the group, which has walked away from more deals than it has done.
“There are some concerns that he [Jooste] is stretching himself . . . has he got the management capacity to take on these massive projects?” said an analyst who did not want to be named.
Steinhoff has said previously that bedding does not travel well. “It’s like beer,” said the analyst. “It’s very difficult to manufacture bedding in one country and ship long distance to another place, because essentially you’re shipping a lot of fresh air. The prospect of getting synergies through making in Europe and selling in the US seems a little far-fetched.”
There could be some synergy in transferring some of the European marketing expertise.
Steinhoff has been on the acquisition trail for months since it listed in Frankfurt last year, and attempted three takeovers in Europe this year. The first two attempts did not succeed. It got the go-ahead from Poundland to buy that retailer, but now an activist investor has emerged.
Since Poundland recommended the offer of £450-million (about R7.8-billion), US activist hedge fund Elliott Management has built a 17.5% stake in the company. Steinhoff, which needs approval from 75% of the shares it does not already own for the deal to happen, increased its bid on Thursday.
According to the Financial Times, this is post-merger and acquisition arbitrage, or “bumpitrage”, whereby funds agitate for a rise in bid prices.
Mattress Firm Holding put forward plans in June to help improve its weak performance and rebrand its stores under the Mattress Firm umbrella.
Over the past year its share price has dropped nearly 52%, yielding a market value of about $1.12-billion, after several acquisitions and poor performance.
South African companies do not have a great record in the US. When Old Mutual first went into the US it did not work out, although it now successfully runs an asset management company.
Discovery had to close down Destiny Health, reconfigure operations and limit its exposure, but it kept Vitality operating there, which is now working. One of the few industrialists to be a success in that country is Natie Kirsh, who runs operations that supply wholesale goods to small stores and restaurants.
There are some concerns that he [Jooste] is stretching himself . . .