Venture Capital and Franchising

Sun Gapital Springs Mattress
Company lntoShape

SNAPSHOT:
Flrm: Sun Capital Partners
Target: Mattress Firm
Price $450 million
Return Multlple 68x
Buyer:J.W Childs
Flnanclal Adviser: William Blair
If anyone doubted that Sun Capital Partners could do much with a flagging mattress retailer, the tumaround shop put those doubts to bed last year. In January 2007, the Boca Raton-based shop sold MattressFlrm for a brisk 68x invested capital after four years of work.

Apparently, it was never a deal that Managing Director Steve Llff had to sleep on. Houston-based Mattress Firm was a great company that was underperforming and in need of operational support and capital. "We likect it from day one," Liffsaid.

Moreover, the slumbering giant came cheap. Sun Capital committed just $4.5 million in equity; another $30 million in debtcame from lenders, including, primarily, Cerberus Capital

Management. A little more than four years later, following an operational overhaul, a strategic refocusing and a build-up through acquisition, Sun Capital sold Mattress firm in a secondary
cleal worth $450 million.

Indleed, this a deal ripped from the Sun Capital playbook. The buyout firm seized an oppoftunity to buy a sagging division of a larger corporation, plunking down a small slice of equity to take a neglected but nonetheless valuable operating unit off the hands of a grateful parent. It then injected its operational and financial know-how into the company, producing something far
different than a sleeper hit.

Still, even Sun Capital, owner of a number of furniture companies, "didn't think [Mattress Firm] would be the huge home run that it was," Liff said. That's largely because Mattress Firm begged for moderate, not sweeping, reforms. Opening 85 more, while at the same time closing outlets in five unprofitable markets.

Marketwide trends also contributed to Mattress Firm's newfound success. The company got a boost from soaring mattress prices and sales volume thanks to Tempur-Pedic beds, whose "memory foam" technology costs thousands of dollars and whose enormously popular products began flþg from the stores. Plus, Americans began showing some desperation for shuteye.

"We really hacl the wind at our back, with so many pharmaceutical companies introducing new sleep drugs and people becoming more proactive about sleeping well." Liffsaid.

After a little more than four years of ownership, Sun Capital juiced the company's balance sheet, increasing EBITDA by a whopping 22x. ln January 2007, Sun Capital found a willing buyer in LBO shop J.W. Childs, which paid $450 million for the company. Not bad for a $4.5 million
equity investment.

Sun Capital nabbed the company in the first place because it didn't fall asleep at the wheel and moved quickly into acquisition mode. In 2002, Sealy Corp. owned Mattress Firm, and Mattress Firm was in tum Sealy's biggest customer.'vVhen Sealy's thenowner, buyout firm Bain Capital, decided to take the company public, Bain Capital needed to shed the underperforming Mattress Firm unit.

Bain Capital brought the deal to Sun Capital, which quicldy agreed to take the unit offBain
Capital's hands. (Bain Capital ended up selling Sealy in 2004 to fellow LBO shop Kohlberg
I(ravis Roberts for $1.5 billion; I(KR rook rhecompany public in 2006.)

The Mattress Firm deal was one of many bright spots in 2007 for Sun Capital.
Through the end of the year, the firm's first three funds have exited a combined 64
companies for an estimated gross IRR of 75 percent. The firm's fourth fund, which
closed on $1.5 billion in April 2005, has exited from 36 companies for an estimated
gross IRR of56 percent.

Meanwhile, the firm needed a scant 47 days in 2OO7 to close on S6 billion for its fifth tund, far surpassing its $4 billion goal. Last year Sun Capital also notched an 18x return on another turnaround play, selling Horsehead Holdings, the biggest zinc proclucer in the U.S., for $342 million.-C.L.

For example, the former Malachi Mattress America Inc., which owned 200 stores and was at the time of acquisition the nation's second largest nÌattress retailer, had no idea how many potential customers were walking through its doors each day, and the showrooms themselves were poorþ
desigaed and inhospitable. Moreover, many of its employees appeared sloppy and indifferent
to customers. These were small, almost cosmetic concems, but they were crucial because Mattress Firm, like all mattress retailers, competed in a highly aggressive business known for its small margins. Every bit counted.

But the company's basic strategy was sound. There was no management shakeup;
Sun Capital didn't replace Mattress Firm's longtime CEO, GaryFazio, a formerexecutive
at mattress manufacturer Sealy Corp. Rather, under Sun Capital's stewardship,
Mattress Firm made its stores more welcoming and homelike by installing wood floors
and hanging artwork on the walls. The company created supercenters with greater
selection. It also raised the bar on who worked for the company and took a greater
interest in what they did on the job. That included tracking customers' comings and
goings and giving them more elaborate service. Perhaps nrost important, Mattress
Firm grew like crazy, acquiring 98 stores and

Why The Firm Won

o The firm achieved a gaudy return on a solid turnaround play.
o Sun Capitalgenerated 22x EBITDA
growth through a combination of
strateg¡c, operational and
fi nancial improvements.
¡ The firm took a neglected
corporate unit and turned it into
market leader.

Reprinted trom Buyouts, Yearbook 2008 . 195 Broadway, gth Floor, New York, NY 10007 . (646) 822-3049