Sealy Investor Targets KKR

Second biggest holder accuses PE firm of poor governance, proposes changes.

KKR & Co., the private equity firm that owns 45 percent of Sealy Corp., is being targeted by the mattress maker’s second-largest shareholder for “significant corporate governance deficiencies” that it says have stifled Sealy’s performance.

H Partners Management LLC, which owns 14 percent of Sealy, said in a letter to the company’s corporate governance committee that KKR has “overloaded” the firm with debt and made strategic errors that reduced Sealy’s earnings by half. The New York-based investor also singled out Dean Nelson, head of KKR’s consulting unit and a Sealy director since 2004, for “excessive” influence on the board.

“Since Sealy’s IPO in April 2006, shareholders have suffered a $1.3 billion, or an approximate 90 percent, loss of common equity value,” Usman Nabi and Arik Ruchim of H Partners wrote in the letter dated March 11 and filed with regulators today. “In our view, this value destruction is due to the poor judgment, interference, and conflicts of interest of one shareholder: Kohlberg Kravis Roberts.”

Kristi Huller, a spokeswoman for KKR, declined to comment on the letter.

The private equity firm, run by Henry Kravis and George Roberts, bought Trinity, North Carolina-based Sealy in 2004 for $1.5 billion from an investment group that included Bain Capital LLC. KKR paid $5.78 a share for the bedding maker and took it public two years later for $16 a share.

The shares have since lost 89 percent of their value. Sealy rose 2.9 percent to $1.81 at 10:47 a.m. in New York trading and has gained 5.8 percent this year.

Sealy has been bought and sold by buyout firms since 1989, when its inability to refinance a short-term loan earned it the moniker “burning bed.” Last year the company posted a loss of $9.9 million, following a loss of $13.7 million the year before.

In 2009, it earned $13.5 million in profit. In the middle of that year, KKR extended $177 million in new capital to Sealy -- a move Moody’s Corp. said “reflected KKR’s interest in keeping Sealy financially sound.”

In their letter, Nabi and Ruchim attribute the sagging performance in part to a lack of broader representation on Sealy’s board of directors. The partners propose appointing a representative from H Partners to the board and replacing three directors with KKR affiliations with new members.

Nabi and Ruchim specifically call for Nelson’s resignation, claiming some of the $20.9 million Sealy has paid KKR in consulting fees since 2006 was unnecessary. Nelson heads KKR Capstone, the private equity firm’s operations and consulting business.

“Through our partnership, we’ve achieved better results more quickly than we could have on our own,” Lawrence J. Rogers, Sealy’s chief executive officer, wrote in a block quote on KKR Capstone’s website.

Rogers is set to retire this year after four years as CEO and 33 years at Sealy. Nabi and Ruchim proposed in their letter that an H Partners representative be added to the CEO search committee.

 

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