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Highbridge Capital Management 3Q 2013

Part 4
Highbridge Capital Management 3Q 2013 (Part 4 of 7)

Why did Highbridge Capital buy Tempur Sealy International?

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Highbridge Capital Management, LLC is a multi-strategy alternative investment management firm founded by Glenn Russell Dubin and Henry Swieca in 1992. In late 2004, J.P. Morgan Asset Management purchased a majority interest in Highbridge, creating one of the first and most significant strategic alliances in the hedge fund industry. In July 2009, J.P. Morgan Asset Management completed its purchase of substantially all remaining shares of the firm. Highbridge and its affiliates manage approximately $29 billion in capital for many of the world’s most prominent institutional investors, public and corporate pension funds, endowments, foundations, family offices and high net worth individuals. The firm is based in New York with offices in Hong Kong and London.

The fund bought new positions in Lowe’s Cos Inc (LOW), Schlumberger Ltd (SLB), Groupon Inc (GRPN), and Tempur Sealy International Inc (TPX) in 3Q 2013. It sold its positions in Cosan Ltd (CZZ), Cummins Inc (CMI), and Tractor Supply Company (TSCO).

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

Why buy Tempur Sealy International (TPX)?
Highbridge acquired a 0.43% position in Tempur Sealy International in 3Q 2013.

Tempur Sealy International posted 111.4% increase in 3Q 2013 net sales to $735.50 million on a year-over-year basis. The net sales increase was due to the inclusion of $389.9 million of the acquired Sealy net sales for the third quarter of 2013. The company reported $0.73 earnings per share for the quarter, above analyst estimates.

It said its third quarter results were in line with its expectations. The steps taken to improve Tempur North America’s performance showed progress and led to a slight sales increase during the quarter. Its Sealy business also showed growth during the quarter. However, Tempur International results were slightly below expectations due to continued weakness in Europe. The integration with Sealy continues to progress well, as cost synergies continue as planned, and it expects to capture significant revenue synergies.

In March, the company, which was known as Tempur-Pedic International Inc., completed its acquisition of Sealy Corporation (ZZ) for a total transaction value of approximately $1.3 billion. It also changed its corporate name to Tempur Sealy International, Inc.

The company’s business segments include Tempur North America, Tempur International, and Sealy. Tempur North America net sales increased 0.6%, to $242.4 million in 3Q 2013 from $240.9 million in 3Q 2012, on the back of strong marketing efforts. Tempur International net sales decreased 3.6%, to $103.2 million in 3Q 2013 from $107.0 million in 3Q 2012. Sealy net sales for 3Q 2013 were $389.9 million.

The company said it has accelerated its pace of innovation with products that feature new technology. It’s planning several significant and exciting product launches for 2014, including new innovations across its entire brand portfolio. Marketing initiatives have been undertaken and it will also invest in in-store marketing and direct sales to maximize its sales opportunity driven from national brands and retailer advertising. It said its international opportunity is significant, and over time, it expects to realize over $300 million in revenue synergies from its international markets. It also wants to build world-class supply chain efficiencies related to purchasing and deliveries as well as inventory management to drive sales growth for its retail customers.

The company has a cautious outlook because although it has seen some progress in Tempur North America, demand remains volatile week-to-week, and there’s an overall uncertainty in the market. But management is confident in the company’s long-term potential. It expects to realize upside from revenue synergies as a result of a broader product offerings, access to more channels, and international expansion.

The mattress industry is seeing a consolidation, and sales are expected to pick up with the improvement in the housing sector. Some of Tempur Sealy’s peers facing these changes include Select Comfort Corp. (SCSS), La-Z-Boy Inc. (LZB), and Mattress Firm (MFRM).

Tempur Sealy International is the world’s largest bedding provider. It develops, manufactures, and markets mattresses, foundations, pillows, and other products. The company’s brand portfolio includes many of the most highly recognized brands in the industry, including Tempur, Tempur-Pedic, Sealy, Sealy Posturepedic, Optimum, and Stearns & Foster. The global headquarters for Tempur Sealy International is in Lexington, Kentucky.

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The fund started in 1992 with $35 million in capital and is named after the 19th century aqueduct that connects Washington Heights and the Bronx. It seeks to attain consistent capital appreciation primarily through arbitrage and absolute return investment strategies in the global financial markets.  The firm has evolved over the past nineteen years and developed a diversified multi-strategy investment platform comprising more than six distinct investment strategies which serve as “alpha engines”.  Some of Highbridge’s core absolute return investment strategies include Convertible Bond Arbitrage, Credit, Global Macro, Long/Short Equity and Statistical Arbitrage.

Founder Glenn Russell Dubin was born in 1957 in the Washington Heights section of upper Manhattan. He graduated in 1978 with a degree in economics from Stony Brook University and began his career in finance as a retail stock broker at E. F. Hutton & Co. in 1978.  In 2010, Dubin was instrumental in broadening the Highbridge investment platform by partnering with J.P. Morgan Asset Management to lead the acquisition of a majority interest in Gávea Investimentos, one of Brazil’s most prominent alternative investment managers. Dubin stepped down from the CEO position at Highbridge in July 2013 and continues to remain as the chairman at the firm.

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