South African furniture to car-rentals group Steinhoff made a surprise $3.8 billion swoop on U.S. mattress retailer Mattress Firm (MFRM) , paying $64 a share in cash, or $2.4 billion. When you add in the debt load, Steinhoff is shelling out $3.8 billion for the largest bedding retailer.
The deal will see Steinhoff pay $2.4 billion for Houston, TX-based Mattress Firm's equity and a further $1.4 billion for its debt, much of it the result of the target's own acquisition spree. Mattress Firm paid $780 million for rival Sleepy's last November, in a move that left it too thinly capitalized for the comfort of the markets.
Will Steinhoff's CEO Markus Jooste sleep easily on his new mattress, after agreeing to pay a premium of 115% to the target's closing price of $29.74 per share at the close of trading on Friday and a price to earnings multiple of 38 times?
No wonder The Street's Jim Cramer called the deal "the wackiest acquisition to date in this nutty 2016."
Yet Steinhoff's share was up over 1.5% compared with Friday's closing price in Frankfurt, where it has its main listing, and just under 1% on the Johannesburg Stock Exchange in its home country.
So shareholders seem to have bought into Jooste's own narrative: that the transaction "will allow Steinhoff to not only enter the U.S. market with an industry leading partner and a national supply chain, but it will also expand Steinhoff's global market reach in the core product category of mattresses."
The company also said the transaction is expected to earnings from the first year.
One analyst at a South African bank, who declined to be identified, said he agreed the deal was "kinda pricey," but said Jooste was a "genius", with enormous expertise in tax matters, who had "never put a foot wrong."
"Maybe it's a vote of confidence in Jooste," he said, arguing that this might not, after all, be a dozy deal done by a company still jet-lagged after entering the U.S. for the first time.
"My one caveat," said the analyst, admitting that this was a very brave move even for Jooste, "is that South African companies have not very well in the past when they've come to the U.S."
One other blot on an otherwise stellar performance, has been Steinhoff's repeated failure to close deals for targets in France and Britain. It was outbid by French electronic goods and media retailer Fnac for London-listed French white goods and electricals retailer Darty and in Britain lost out to supermarket J. Sainsbury in the race to buy general merchandise retailer Argos. Its current $796 million bid for discounter Poundland has been undermined by stake-building by activist investors Elliott Management.
Yet Steinhoff's presentation to analysts makes it clear that the company itself is very confident it has made the right move. Mattress Firm's 25% market share in the U.S., means that Steinhoff enters the market with a ready-made, nationwide sales network. It will create a global market player with a presence on five continents and pro forma global sales of $18.8 billion in 2015. Pro forma Ebitda would have been $2.2 billion in the same year and pro forma operating profit of $1.9 billion.
The move will also mitigate Steinhoff's exposure to the weak currencies of its home and European markets. Currently the eurozone and Eastern Europe account for 54% of currency exposures, while South Africa accounts for 33.7%, Australia 6.8% and the U.K. - where it is the largest seller of beds and mattresses through its subsidiary Bensons for Beds, for 5.3%. But bringing the vast U.S. market into the mix will make the dollar the no. 2 currency at 19.5% after the European group, which shrinks to 43.6% of the whole. South Africa falls to 27.1% and the U.K. to 4.3%.
The currency issue is key for Steinhoff, which shifted its listing to Germany late last year and has been investing heavily in Europe in recent years to shift both costs and revenues out of the volatile South African market. Although the South African rand and other emerging market currencies have rallied in recent weeks, and have even made gains against the mighty U.S. dollar, Steinhoff has been careful to spread its risks. Moreover, by sourcing its products in low-wage Eastern and Central European countries as well as in other low-wage economies, while taking over or building market leaders in France, Britain and elsewhere, Steinhoff has built experience in building strong brands.
That said, it is still unclear whether the acquisition in the U.S. will be followed by a move to rejig Mattress Firm's supplier register as Steinhoff pursues its usual strategy of sourcing products in cheaper markets, possibly by moving more production to Mexico, or whether Mattress Firm might end up becoming a sales channel for Steinhoff's existing goods and brands. The latter strategy might create greater synergies, according to the South African analyst, but would be a departure from its previous behavior.