New Coverage: Mattress Firm Works With Guggenheim as Steinhoff Seeks to Address Ongoing Cash Needs of US Business
Steinhoff International Holdings U.S. subsidiary Mattress Firm Inc. is working with investment banker Guggenheim Securities to explore potential options for the company’s capital structure, according to sources. In a presentation to shareholders this morning, Steinhoff outlined a restructuring plan for the various Steinhoff Group “debt clusters,” noting that the company intends to address the debt of Stripes U.S. Holding Inc. (the Steinhoff subsidiary that holds interests in Mattress Firm) together with that of Austria-based Steinhoff Europe AG, or SEAG. The restructuring plan would include addressing the two entities’ approximately €770 million (approximately $945.5 million at today’s exchange rate) of upcoming maturities in July and August, states the presentation.
Total debt outstanding at the U.S. subsidiary totaled €250 million ($306.9 million at today’s exchange rate) on March 31, including the company’s revolving credit facility and ABL facilities, according to a presentation released by Steinhoff this morning.
Mattress Firm has faced operational challenges since being acquired by Steinhoff in September 2016. and the U.S. subsidiary reported a 10% like-for-like sales decline in the first quarter ended Dec. 31, 2017, compared with a 3% decline for the entire Steinhoff group, said the parent in its first-quarter earnings presentation. Steinhoff has taken a series of actions to “accelerate its long-term strategy in the US bedding market,” and those changes have had a “short-term” negative impact on the Mattress Firm business, the company said. As a result, the company is seeking to optimize its store footprint and, on a net basis, closed 91 stores during the first quarter and plans to close 100 stores by the fiscal year-end, it added.
Since making the Mattress Firm acquisition, Steinhoff has rebranded 1,369 stores (or 40% of the total store base) to the Mattress Firm banner, acquired an 80% stake in Sherwood Bedding Company “to help integrate vertical integration” and has reviewed Mattress Firm’s management and operational structures, the earnings report disclosed. Mattress Firm announced a five-year initial strategic partnership with Serta Simmons in March 2017, two months after receiving formal termination notices from its former largest supplier Tempur Sealy for all contracts with the company. Tempur Sealy had announced in January 2017 that Mattress Firm and Steinhoff verbally indicated an intention to terminate all contracts with Tempur Sealy absent considerable changes to contract terms, including “significant economic concessions.” The parties were unable to reach an agreement on terms, and Tempur Sealy issued formal termination notices for all its brands, ceasing to do business with Mattress Firm in the first quarter of fiscal 2017, it said. The supplier change has “resulted in gaps in the product range,” according to first-quarter earnings, which added the company is seeking to “urgently” address those issues.
Also in the first-quarter earnings presentation, the company disclosed that the store rebranding of legacy brands Sleepy’s and Sleep Train similarly put downward pressure on like-for-like sales “primarily in the east and west coast markets,” and management said it expects it will take approximately 18 months for consumers to adopt the new brands. Trading conditions have also been depressed by, among other things, a shift in the U.S. market as the mattress online channel continues to increase market share.
After Steinhoff held “several update meetings” with its lenders and credit insurers in Europe, South Africa, Australia and Asia during December and January, the “majority” of the group’s international operating subsidiaries arranged working capital facilities. In addition to those facilities, the “release of funds” from the company’s South Africa operations and certain limited non-core assets, the parties have “largely addressed the group’s near-term liquidity needs,” the earnings presentation stated. The company added, however, that “given the ongoing cash needs of the group’s operating businesses (in particular Mattress firm in the US)” and the fact that the group has substantially agreed not to access undrawn amounts under the European credit facilities, “work remains to be done” to ensure the operating businesses have sufficient working capital (emphasis added).
According to this morning’s presentation, Steinhoff Group faced a “liquidity crisis” in December 2017 that led to the company losing “virtually all” available funding under its existing facilities including credit insurance. In December 2017, Mattress Firm entered into a new senior secured ABL facility, with funds under the facility available for working capital needs and other general corporate purposes. The ABL facility has an initial aggregate available amount of $75 million, but the company said at the time of its announcement that it intends to upsize the facility via an incremental availability feature to a total aggregate principal amount of up to $225 million. Then at the end of January, the Houston-based retailer announced the departure of Ken Murphy as CEO and announced that the company’s former CEO Steve Stagner would return to assume the role again.
Steinhoff Group said in this morning’s presentation that it has been engaging with creditors across its four debt clusters (which are shown in the below organizational chart) in order to develop a restructuring plan that will address the entire structure. As noted above, Steinhoff is seeking to address Stripes U.S. and Austria-based SEAG together, and it is intended that the Steinhoff Finance Holding 2023 convertible notes will be dealt with as part of the SEAG / U.S. Stripes proposal. As Reorg Europe reported previously, Steinhoff Mobel or SEAG may have €1.266 billion of receivables from Stripes Acquisition Corp. as a result of intercompany transactions entered into to finance the 2016 purchase of Mattress Firm.
This morning’s presentation includes the following organizational chart for Steinhoff. We note however that Stripes is 98% owned by Parentco Steinhoff International Holdings NV (not Steinhoff Finance), and 2% owned by Stripes’ management.