Investing Between The Sheets

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Who could have imagined twenty years ago that so many people would start sleeping on foam. However, that's just what's happened. A new technology came out in an old industry, mattresses, and changed the battle field. Sure, the foam is expensive, and kind of cool, but it's foam just the same. Now, the upstart selling the foam is looking to buy one of the old guard, as Tempur-Pedic (NYSE: TPX) is looking to buy Sealy Corporation (NYSE: ZZ).

Not A Slam Dunk
The Federal Trade Commission (FTC) is taking a close look at the proposed deal, however, because it could materially alter the competitive landscape in the mattress industry. Most people don't think about mattress competition, particularly since beds tend to be purchased infrequently by any one individual. But the truth is that there aren't too many pure-play competitors in the mattress manufacturing space. Aside from Tempur and Sealy, the only other notable publicly traded manufacturer is Select Comfort (NASDAQ: SCSS). That said, there are plenty of companies that sell mattresses, including department stores, discount retailers, wholesale/club stores, and specialty stores like Mattress Firm (MFRM).

Everyone Needs A Bed
After replacing an “old” mattress, moving to a new home is one of the biggest reasons for buying a new mattress. Thus, sales for the above firms were elevated during the housing bubble and generally faltered during the housing led recession. With a slow economy and a still struggling housing market, sales have been bumpy throughout the bedding industry. Tempur is largely at the high-end of the bedding market, however, and this segment has benefited from the fact that the wealthy have fared better of late than the middle class. Select Comfort has done a reasonable job adjusting to the new world, too, with its high end beds, but faced a period where some questioned its survival. Thus, it isn't exactly in a position to be acquisitive.

Not A Great Industry
The bedding market, however, is anything but a growth industry right now. So, with its ability to expand limited by the industry's malaise, Tempur appears to be looking to expand via acquisition. This could be a good thing if the additional scale gives it more pricing power. It looks like the company will, at the very least, be able to reduce Sealy's borrowing costs and, thus, save some money there. However, material costs will also likely be a place where it can save money. It may also be able to do more though merging its foam technology, which is not proprietary or unique anymore, with Sealy's collection of mattresses. Bringing two name brands together might be a winning proposition.

That last fact, however, is one of the reasons why the FTC wants to know more about the proposed deal. At the end of the day, a relatively strong player is taking over a weaker one, but the number of options for consumers would be notably reduced. This could be a good thing or it could saddle Tempur-Pedic with troubles that it didn't count on. After all, the company would be entering a space that it has traditionally not played in—regular beds. So there is a material risk of Tempur being dragged down over the near-term if this purchase goes through as planned.

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TPX data by YCharts

A Fall From Grace
After a painful share price decline in the middle of 2012, Tempur appears to be more reasonably priced than it had been. This deal could entice some investors to jump in. That said, the proposed deal isn't without risk and the mattress industry is still in recovery mode. Investors would probably be better off waiting for a housing and/or a notable economic rebound before taking a position in any of these companies.


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ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of Tempur-Pedic International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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