Funds Bid For Sleep Country

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Christine Magee hit some bumps steering her Sleep Country mattress empire into the now slumping U.S. market but her prospective new backers seem keen to stay the course.

Company management, including Ms. Magee, president of Sleep Country Canada Income Fund, are backing a $356-million takeover offer of their firm by two Toronto-based investment funds.

Sleep Country’s units have been battered as business at its more than 200 stores weakens along with a slumping housing market, particularly at the 46 U.S. outlets. In the second quarter, Sleep Country’s U.S. same-store sales continued to crash, dropping 27 per cent, although its Canadian same-store sales improved by 4.5 per cent.

“We’re not worried about the next quarter or the next six months,” said Pierre Schuurmans, chief operating officer of Birch Hill Equity Partners Management Inc., one of two firms that want to buy Sleep Country. “We look at a longer horizon.”

Yesterday, investors applauded the bid by Birch Hill and Westerkirk Capital Inc. to buy Sleep Country for $22 a unit and take it private. The shares shot up more than 36 per cent on the Toronto Stock Exchange.

The new owners would keep current management in place, including Ms. Magee and Stephen Gunn, the chief executive officer – a signal that they support their strategy, observers said. Ms. Magee doubles as the company’s marketing face in advertising.

“We typically invest in companies with strong management teams and good growth prospects and we see that here as well,” Mr. Schuurmans said in an interview.

Sleep Country has suffered along with an array of other retailers as consumers tighten their belts, and even more so south of the border. Over the past year, sales in the $950-million Canadian bed and mattress market slipped 3 per cent, according to market researcher Synovate.

Still, Sleep Country, as the leading retailer in the sector, is positioned to benefit from the weakness, industry observers said. The U.S. business generates about 10 per cent of the retailer’s $360-million of annual sales.

“A company like Sleep Country has a tremendous ability to pick up market share when the environment softens a little,” said Michael Krestell, retail analyst at M Partners in Toronto. “The independents and the department stores are suffering a little bit more in this environment.”

Sleep Country has been building its image by investing in advertising to pitch its name. It tries to pay careful attention to its service, providing booties for its delivery men to don when they haul mattresses and beds into customers’ homes.

The chain was able to improve its domestic performance in the second quarter, partly by putting more of a push on pillows. They carry a higher profit margin than the core beds and mattresses, even though their price tags are much lower.

The strategy has helped Sleep Country attract customers with slightly higher annual household incomes – $66,200 – compared with that of customers at other retailers ($59,700), said Adrian Murphy, a vice-president at Synovate Canada.

“It’s a very well run company, operationally and from a strategic point of view,” Mr. Krestell said.

For the would-be buyers, Sleep Country is an opportunistic play at a time when its share price is so low, analysts said. Just two weeks ago the stock was trading below $16.

SLEEP COUNTRY (Z.UN)

Close: $21.80, up $5.83

By the numbers

$950-million

Estimated market size (12 months ended June, 2008) for mattresses and sleep sets.

$901

Average expenditure on a purchase of a mattress and sleep set.

$66,200

Average annual household income of customers who buy from Sleep Country.

$59,700

Average annual household income of customers who buy from other retailers. 1

Sleep Country’s rank in Canadian market share. In order, Sleep Country is followed by Sears, the Brick, Leon’s and the Bay.

Author: MARINA STRAUSS
Source: The Globe and Mail

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