It's no surprise Mattress Firm (MFRM) shareholders are growing restless after jumping into bed with a mountain of sub-investment-grade debt.
The Houston-based company's goal has been to take on a pile of leveraged loans in order to purchase rival mattress maker Sleepy's, or rather their parent company HMK Mattress Holdings. And, as Real Money reported, soon after a waiting period governed by the Hart-Scott-Rodino Antitrust Improvements Act expired last month, Barclays (BCS) began shopping the leveraged-loan package to back the roughly $780 million acquisition.
But, with shares down 23% on the year and total debt now doubled to about $1.4 billion in pricey leveraged loans (the latest slice will pay out roughly 6.25% in annual interest), investors are counting on how well they can merge with Sleepy's and HMK Mattress's other holdings.
CEO Stephen Stagner's expects roughly $40 million in synergies and is confident that Mattress Firm has substantially reduced its debt load to make room for the speculative new debt (rated Ba3 by Moody's and B+ by S&P).
"We've been able to generate very strong free cash flow in the past two quarters," he said at an industry conference. "We've paid down $77 million in debt. That's because this business generates a lot of cash. And we anticipate that we're going to be able to generate a lot of cash approximately $100 million in cash this year in 2016."
He also pointed to $11 million in tax deductions stemming from the Sleepy's acquisition and expects to boost Mattress Firm's roughly $2.5 billion in sales over the past four reported quarters by 44% through the merger.
"So, we understand that we are taking on some more debt, but at the exact same time we'll have a very strong opportunity to pay down that debt, and we see that we'll be able to pay down quite a bit of debt within this first year," he said. "With over 2,400 locations before this Sleepy's acquisition, we have the largest footprint in the United States."
Stagner's ability to pay down his newly-acquired leveraged loans will be crucial, especially as many such as Sprint (S), a member of Real Money's distressed watch list, have nearly been flattened under the weight of their sub-investment-grade debt.
And it appears Mattress Firm's ability to get out from under what may become a serious leverage problem will depend on how good a bedfellow newly-acquired Sleepy's can be.