Bloomberg News

Sealy Shareholder H Partners Demands Answers on KKR Fees

March 27, 2012

H Partners Management LLC, the second-largest shareholder (ZZ:US) of Sealy Corp. (ZZ:US), stepped up its confrontation with the mattress maker over its declining market value and payments to KKR & Co., its biggest investor.

H Partners, in a letter today to Sealy’s nominating and corporate governance committee, posed questions concerning what it called “the payment of millions of dollars in questionable fees to KKR.” The New York-based investment firm earlier this month proposed appointing a representative to the board and replacing three directors with KKR affiliation with new members, steps Sealy rejected.

“If you fail to comply with our demands then we intend to withhold support for Sealy’s incumbent directors,” H Partners said in the letter signed by partners Usman Nabi and Arik Ruchim. The firm isn’t running a competing slate of directors in an election set for the company’s April 18 annual meeting, according to the letter.

Gemma Hart, an spokeswoman at Brunswick Group for Trinity, North Carolina-based Sealy, declined to comment, as did Kristi Huller, a spokeswoman for KKR in New York.

H Partners in the letter asked why independent directors authorized “at least $9.7 million in payments to KKR for advisory services only two years after paying $11 million to terminate” such services from the private-equity firm. Other questions in the letter focused on whether Sealy made “large undisclosed payments to KKR” and why disclosure of payments to KKR is “inconsistent.”

Earnings Report

H Partners holds a 15 percent stake in Sealy, after adding almost 864,500 shares on March 20, according to a filing with the U.S. Securities and Exchange Commission. KKR, which took Sealy private in 2004, owns 45 percent of the company, according to data compiled by Bloomberg. Sealy went public in 2006.

The company today reported net income (ZZ:US) from continuing operations of $1.6 million, or 1 cent a share, in the first quarter ended Feb. 26. That compared with profit of $130,000, or zero cents, a year earlier, and exceeded the average estimate of a loss of 2 cents a share by seven analysts surveyed by Bloomberg. Sales increased 2.2 percent, to $312.3 million.

On March 23, Gary E. Morin, chairman of the nominating and corporate government committee, rejected H Partners’ demand for board changes.

Bond Underwriter

“The board is composed of strong, highly qualified and committed members,” Morin wrote in a letter. Morin also rejected H Partners’ contention that Sealy’s board is dominated by KKR, saying five of nine directors meet New York Stock Exchange guidelines as independent.

In today’s letter, H Partners said Morin “failed to explain why almost 90 percent, or $1.3 billion, of value has disappeared since Sealy’s IPO in 2006.” It also reiterated complaints about the company’s governance and KKR’s transparency and added a new one.

H Partners cited an August 2010 investor presentation by KKR highlighting its “profitable” underwriting business, with one example being fees generated as underwriter of $350 million of Sealy first lien bonds issued in 2009.

“We have found no disclosure of any payment to KKR for its role as ‘underwriter’ of the first lien bonds,” the letter said.

KKR, run by Henry Kravis and George Roberts, bought Sealy 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.

Sealy closed today at $1.88, down 2 cents, in New York trading. The earnings were released after the end of regular trading.

To contact the reporters on this story: John Helyar in Atlanta at jhelyar@bloomberg.net; 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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