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Investing.com -- Tempur Sealy (NYSE:TPX) International Inc. (Tempur) completed its acquisition of Mattress Firm Group Inc. on Feb. 5, 2024, for a total price of around $5 billion. The deal was financed with roughly $2.7 billion in cash and the rest in common stock issued to Mattress Firm shareholders. According to S&P Global, after the acquisition, the company’s pro forma leverage was roughly 3.8x for the 12 months ending Sept. 30, 2024, which is within the 4x downgrade limit for Tempur’s rating. As a result, Tempur’s ’BB’ ratings were confirmed.
Tempur’s $1.6 billion senior secured term loan B was also assigned a ’BBB-’ issue-level rating. The recovery rating is ’1’, indicating a very high recovery expectation of 90%-100%. Both tranches of Tempur’s senior notes were removed from CreditWatch with negative implications, and the issue-level ratings on this debt were lowered to ’BB-’ from ’BB’. The recovery rating on this debt was revised to ’5’ from ’3’ due to the significant increase in senior secured debt in the capital structure and increased lease claims with the addition of Mattress Firm, which weakens recovery prospects for unsecured debtholders.
The stable outlook is based on the expectation that Tempur will deleverage to about 3.2x over the next year. To fund the acquisition, Tempur used its $1.6 billion senior secured term loan B and $625 million senior secured delayed draw term loan A, and also borrowed under its revolving credit facility. S&P Global Ratings-adjusted debt is estimated to have increased to about $6.7 billion, including $1.3 billion of Mattress Firm leases considered as debt, up from $2.9 billion as of Sept. 30, 2024.
Despite expected constraints on consumer discretionary spending, including slowing income growth and high interest rates, Tempur’s sales are forecasted to increase at least 3% in fiscal 2025 due to distribution gains, new product launches, and replacement demand. Tempur is expected to continue to benefit from easing input costs and greater operating efficiency. The company’s S&P Global Ratings-adjusted EBITDA margin improved about 130 basis points year-over-year to 21.1% during the 12-month period ended Sept. 30, 2024.
The company is expected to use its strong free operating cash flow (FOCF) for debt repayment. Tempur’s FOCF has improved due to higher profitability, lower capital expenditures, and lower working capital use. It reported FOCF of about $460 million for the nine-month period ended Sept. 30, 2024, compared with $326 million for the same period in the previous year.
The rating could be lowered if Tempur’s operating performance deteriorates, or the company demonstrates more aggressive financial policies. This could happen if macroeconomic conditions weaken, leading to less-than-expected consumer discretionary spending and lower demand for mattresses, if the integration of Mattress Firm is not successful and either company loses market share, or if Tempur conducts large, debt-financed share repurchases or acquisitions. Conversely, the rating could be raised if Tempur can maintain leverage below 3x through economic downturns or if it sustains leverage below 4x with an upward revision of Tempur’s business risk assessment.
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