Bloomberg News

Sealy Holder Targets KKR for ‘Poor’ Governance, Proposes Changes

March 12, 2012

KKR & Co. (KKR), the private equity firm that owns 45 percent of Sealy Corp. (ZZ), 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. In an e-mailed statement, Sealy said it “will consider H Partners’ latest comments with appropriate care.”

“The company is focused on its strategic and operating priorities for 2012, and is committed to delivering long-term shareholder value for the benefit of all shareholders,” Sealy said through an outside spokeswoman, Gemma Hart of New York- based Brunswick Group Inc.

‘Burning Bed’

KKR, 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 88 percent of their value. Sealy rose 5.7 percent to close at $1.86 in New York. The stock has gained 8.1 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.”

Board Representation

In their letter, which the Wall Street Journal first reported yesterday, Nabi and Ruchim attributed 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.

To contact the reporter on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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