(By Balaseshan) Sealy Corp. (NYSE:ZZ) shares rose 2.80% in premarket after the bedding manufacturer agreed to be acquired by Tempur-Pedic International Inc. (NYSE:TPX) for about $1.3 billion. However, Sealy reported a 98.5% drop in quarterly earnings due to higher national advertising costs.
Tempur-Pedic will acquire all of the outstanding common stock of Sealy for $2.20 per share, representing a premium of about 23% to Sealy's 30-day average closing price on Wednesday. In addition, Tempur-Pedic will assume or repay all of Sealy's outstanding convertible and non-convertible debt.
Tempur-Pedic and Sealy will operate independently. Larry Rogers, Chief Executive of Sealy, who has been with the company for 33 years, will remain CEO of Sealy and report to Tempur-Pedic Chief Executive Mark Sarvary.
The combination is expected to be accretive in the first full year of operations, with annual cost synergies from the combined operations expected to be in excess of $40 million by the third year. These will be primarily realized through purchasing, supply chain and increased efficiencies.
In addition, the combination, which will create a $2.7 billion global bedding provider, has the potential for revenue synergies as a result of a broader product offering and access to more channels, including international expansion. The transaction is expected to close during the first half of 2013.
In a separate release, Sealy posted third-quarter earnings from continuing operations of $110,000 or break even per share, down from $7.49 million or $0.04 per share last year. Sales grew 9.4% to $365.4 million.
The latest quarter results included $6.6 million of higher national advertising costs, which primarily related to the rollout of Sealy's Optimum by Sealy Posturepedic line as well as higher compensation related expense.
Analysts, on average, polled by Thomson Reuters had expected a profit of $0.03 per share on revenue of $344.21 million for the third quarter.
Gross margin decreased 0.4 percentage points to 40.6%, due to decreases in gross margin in the company's International operations. The gross margin in Canada declined 2.3 percentage points to 40.3%, primarily driven by the impact of higher raw material costs. U.S. gross margin decreased 0.3 percentage points to 40.5%.
While Sealy had originally planned to host third-quarter conference call at 5pm ET, due to the recent transaction announcement with Tempur-Pedic this call has been cancelled.
ZZ closed Wednesday's regular session at $2.14, while TPX ended at $26.78.