Buyout Firms as Company Debt Soared
For most of the 133 years since its founding in a small city in Wisconsin,
the Simmons Bedding Company enjoyed an illustrious history.
slumbered on its mattresses aboard Air Force One. Dignitaries have slept on
them in the Lincoln Bedroom. Its advertisements have featured Henry Ford and
H. G. Wells. Eleanor Roosevelt extolled the virtues of the Simmons Beautyrest
mattress, and the brand was immortalized on Broadway in Cole Porters
song Anything Goes.
Its recent history
has been notable, too, but for a different reason.
it will soon file for bankruptcy protection, as part of an agreement by its
current owners to sell the company the seventh time it has been sold
in a little more than two decades all after being owned for short periods
by a parade of different investment groups, known as private equity firms,
which try to buy undervalued companies, mostly with borrowed money.
For many of
the companys investors, the sale will be a disaster. Its bondholders
alone stand to lose more than $575 million. The companys downfall has
also devastated employees like Noble Rogers, who worked for 22 years at Simmons,
most of that time at a factory outside Atlanta. He is one of 1,000 employees
more than one-quarter of the work force laid off last year.
But Thomas H.
Lee Partners of Boston has not only escaped unscathed, it has made a profit.
The investment firm, which bought Simmons in 2003, has pocketed around $77
million in profit, even as the companys fortunes have declined. THL
collected hundreds of millions of dollars from the company in the form of
special dividends. It also paid itself millions more in fees, first for buying
the company, then for helping run it. Last year, the firm even gave itself
a small raise.
investment banks also cashed in. They collected millions for helping to arrange
the takeovers and for selling the bonds that made those deals possible. All
told, the various private equity owners have made around $750 million in profits
from Simmons over the years.
How so many
people could make so much money on a company that has been driven into bankruptcy
is a tale of these financial times and an example of a growing phenomenon
in corporate America.
Every step along
the way, the buyers put Simmons deeper into debt. The financiers borrowed
more and more money to pay ever higher prices for the company, enabling each
previous owner to cash out profitably.
But the load
weighed down an otherwise healthy company. Today, Simmons owes $1.3 billion,
compared with just $164 million in 1991, when it began to become a Wall Street
version of Flip This House.
In many ways,
what private equity firms did at Simmons, and scores of other companies like
it, mimicked the subprime mortgage boom. Fueled by easy money, not only from
banks but also endowments and pension funds, buyout kings like THL upended
the old order on Wall Street. It was, they said, the Golden Age of private
equity nothing less than a new era of capitalism.
investors were able to buy companies like Simmons with borrowed money and
put down relatively little of their own cash. Then, not long after, they often
borrowed even more money, using the companys assets as collateral
just like home buyers who took out home equity loans on top of their first
mortgages. For the financiers, the rewards were enormous.
buying Simmons, THL borrowed more. It used $375 million of that money to pay
itself a dividend, thus recouping all of the cash it put down, and then some.
A result: THL
was guaranteed a profit regardless of how Simmons performed. It did not matter
that the company was left owing far more than it was worth, just as many people
profited from the mortgage business while many homeowners found themselves
bought that debt are getting virtually nothing in the new deal.
experience, none of the private equity firms were building a brand for the
future, said Robert Hellyer, Simmonss former president, who worked
for several of the private equity buyers before being asked to leave the company
in 2005. Plus, the mind-set was, since the money was practically free,
why not leverage the company to the maximum?
Just as with
the housing market, the good times ended when the economy fell into recession
and the credit markets froze. Simmons is now groaning under a huge amount
of debt at a time when its sales are slowing. And this time there is no escaping
by finding yet another buyer willing to shoulder its entire burden.
Simmons is one
of hundreds of companies swept up by private equity firms in the early part
of this decade, during the greatest burst of corporate takeovers the world
has ever seen. Many of these deals, cut in good times, left little or no margin
for error let alone for the Great Recession.
number of the companies that were acquired during that frenzy are now struggling
with the enormous debts. More than half the roughly 220 companies that have
defaulted on their debt in some form this year were either owned at one time
or are still controlled by private equity firms, according to analysts at
Standard & Poors. Among them are household names like Harrahs
Entertainment and Six Flags, the theme park operator.
THL counter that Simmons was the victim of hard economic times, not mismanagement
or too much debt. As proof, executives point to Simmonss 40 percent
growth in sales and its 26 percent climb in operating income from 2003 through
2007 as well as its 13 consecutive quarters of market share gains against
competitors through March 2009.
woes, said Scott A. Schoen, a co-president of the firm who sat on Simmonss
board, are entirely caused by the unprecedented and unforeseeable
downturn that has shaken the entire bedding industry.
the work we had done had positioned the company for us to reap the financial
rewards that this economic cycle has taken away, said Mr. Schoen, gazing
across a conference table at THLs headquarters overlooking Boston Harbor.
Still, he acknowledged,
We are clearly disappointed in the outcome of this investment. Make
no bones about it.
Built Over Generations
Like other emerging
industrialists of the 19th century, Zalmon G. Simmons, of Kenosha, Wis., had
his hand in numerous businesses the local bank, a telegraph company,
a railroad and a cheese-box factory. He was even, for a time, the mayor of
Mr. Simmons came across a new machine that could mass-produce woven wire mattresses.
The Simmons bedding company was born.
From its humble
beginnings on the banks of Lake Michigan, Simmons grew to become one of the
countrys largest manufacturers of mattresses. Along the way, it even
sprinkled a little Hollywood pixie dust on the ho-hum mattress business, hiring
Dorothy Lamour and Maureen OHara to plug its products.
Until the 1970s,
Simmons largely prospered. Then the troubles started, and the company was
soon buried deep inside two enormous conglomerates, Gulf & Western and
the Wickes Corporation, for a number of years.
But in the mid-1980s,
Simmons caught the attention of a new type of investor. The businesses that
stormed corporate America in recent years under the banner of private equity
were not always called private equity firms. In the 1980s, they were known
as leveraged buyout shops. Their strategy is essentially unchanged, however:
they try to buy undervalued companies, using mostly borrowed money, fix them
up and sell them for a fast profit.
pile debt onto the companies they buy, the firms free up their own cash, allowing
them to make additional investments and increase their potential profits.
first trip through the revolving door of private equity came in 1986. Like
the latest trip, it was not a pleasant one for employees, but the buyers did
William E. Simon,
a private equity pioneer and a Treasury secretary under President Richard
M. Nixon, was the man with the golden touch. In 1986, his investment firm,
Wesray Capital, and a handful of Simmonss top managers acquired the
company for $120 million, the bulk of which was borrowed. After selling several
businesses to pay back some of the money it had borrowed, Wesray cashed out
in 1989. It sold Simmons to the companys employee stock ownership plan
for $241 million twice what it paid just three years earlier.
The deal was
a fiasco for the employees. As part of the buyout, Simmons stopped contributing
to its pension plan, since the stock ownership plan shares were meant to pay
for the employees retirements. But then the bottom fell out of the housing
market and Simmons, with its large debt, stumbled. Its pensions crumbled as
the value of the stock plan shares plunged.
of private equity buyers came and went. Merrill Lynch Capital Partners bought
Simmons in 1991 for $32 million for a 60 percent stake in the company and
the assumption of its debt. Merrill sold it to Investcorp, an investment group
based in Bahrain, for $265 million in 1996. Two years later, Investcorp sold
the company to Fenway Partners for $513 million.
tenure, Simmons released one of the industrys biggest innovations: the
no-flip mattress. Profits soared. But after five years, Fenway executives
decided to cash out. By the fall of 2003, Simmons was back on the block.
Teddy Bear at
A longtime figure
in investment circles, Thomas H. Lee vaulted into the big leagues of private
equity with what is regarded as one of the legendary deals of all time. After
founding Thomas H. Lee Partners in 1974, he grabbed headlines in 1994 when
he sold Snapple, the iced tea maker, for $1.7 billion to Quaker Oats. He bought
the company two years earlier for around $130 million.
But while other
captains of the buyout craze like Henry Kravis of Kohlberg Kravis &
Roberts chased giant companies in hostile deals, Mr. Lee focused largely
on midsize companies and steered clear of deals where he was not welcome.
The research firm Hoovers describes Thomas H. Lee Partners as the
teddy bear at the gate.
Mr. Lee, scion
of the family that founded the Shoe Corporation of America, left his namesake
firm in 2006 to start another investment company. During his 30-year tenure
at THL, his firm invested in a series of big names: Ghirardelli Chocolate,
Petco Animal Supplies and General Nutrition Companies, among others. And by
2003, as the buyout boom began to build, his firm had Simmons in its cross
The fall of
2003 was little more than a blur of meetings and presentations for Robert
Hellyer, the former Simmons president who is among the fourth generation of
his family involved in the mattress industry. In eight weeks, the company
was shown to 20 private equity suitors in the corporate version of speed dating.
The list of
potential buyers was quickly whittled to three and finally to THL, whose $1.1
billion bid for the company consisted of $327 million in new equity from the
firm and more than $745 million in bonds and bank loans that had to be raised
good guys; very smart guys, Mr. Hellyer said. Their thesis was
to buy a good business with good management and let them get better.
What THL wanted
from the deal was a return of two to three times its initial investment.
From the get-go,
the lofty price the firm paid for Simmons and the amount of debt raised red
flags on Wall Street.
debt burden will limit the companys ability to respond to unexpected
negative business developments, including economic or competitive threats
or internal missteps, analysts at Moodys Investors Service warned
at the time.
it seems, was listening. Six months after acquiring Simmons, THL set in motion
plans to take the company public. And by December 2004, THL found a way to
get part of its initial investment back. Simmons issued debt that required
the company to pay a hefty 10 percent annual interest rate. The proceeds were
used to pay THL a dividend of $137 million. With the companys debt climbing,
Simmons executives had to aim high with new products and pray they
In late 2004,
Simmons unveiled the HealthSmart mattress in a blitz of marketing.
It gave away
250 beds to the audience of The Ellen DeGeneres Show. It began
a $15 million advertising campaign. It put coupons for free HealthSmart beds
in celebrity souvenir bags during New Yorks Fashion Week.
A mattress line
aimed at combating dust mites, mold and germs, the HealthSmart featured a
zip-off top that could be washed or dry cleaned. But in the rush to get the
product to market, Simmons did not go through its normal research and testings,
Mr. Hellyer says.
was a flop. Consumers did not like the mattress they thought the zip-on
cover was troublesome. Sales at the company slid nearly 8 percent in the first
quarter from the previous year.
ensued. Thomas H. Lee came in and pulled the national advertising right away,
said a former Simmons employee involved with HealthSmart who declined to be
named because he is still involved with the mattress industry.
its plans to take Simmons public, and the company shook up its sales division.
By the third quarter of 2005, Simmons had one of the best quarters in
the companys entire history up to that point, a spokesman for
THL said in an e-mail message. The numbers tell a slightly different story:
Net sales declined 4.8 percent in that quarter from a year earlier, and operating
income fell to $25.1 million, from $25.5 million in the third quarter of 2004.
Later, spokesmen for THL and Simmons clarified the statement by saying that
after excluding a one-time reorganization expense, an adjusted earnings figure
for the quarter was the 10th best in the companys history.
THL say they moved quickly to put Simmons back on track.
a dozen THL professionals have devoted literally thousands of man-hours to
Simmons, including making over 115 visits to company headquarters and site
facilities around the country, the firm said in a statement.
it argued, speak for themselves. In the following years, Simmonss sales
and profits climbed, and the company introduced several new products, including
the successful premium-price Beautyrest Black line of mattresses.
By early 2007,
at the very top of the credit market bubble, THL took a bit more out of Simmons.
It created a holding company that it used to issue $300 million more in debt,
which paid an additional $238 million dividend to the private equity firm.
With that, THL had recouped its entire $327 million equity investment in Simmons
and booked a profit of around $48 million. (It made an additional $28.5 million
in various fees over the years.)
THL was hardly
alone in undertaking this sort of financial engineering, known as a dividend
recapitalization. From 2003 to 2007, 188 companies controlled by private equity
firms issued more than $75 billion in debt that was used to pay dividends
to the buyout firms.
the 2007 dividend was too much for Simmons, Mr. Schoen of THL defended the
financing, which clearly spelled out to the market the use of the proceeds,
was extremely well received. The securities were heavily oversubscribed,
Mr. Schoen said. Not only did we think it was appropriate, but the market
did as well, he added.
As the economy
soured in late 2007, so did Simmonss sales. The company slashed costs
and cut jobs throughout 2008. But last fall, unable to meet the terms of its
bank loans and debt dating back to the 2003 acquisition itself, Simmons stopped
making interest payments to its bondholders. THL began talking to the banks
and bondholders about how to lighten Simmonss debt load, and put the
company up for sale.
The Impact on
From the start,
Noble Rogers loved working at Simmons.
were picnics, March of Dimes walks, Christmas parties, and we always had Halloween
parties. It was a really family-oriented company, Mr. Rogers, 50, recalled.
I told my wife that this was a great place for me to work. A great place
for me to retire, to make a living at.
For a long time,
it was. For 22 years, Mr. Rogers worked at Simmons, the bulk of those years
at a factory in Mableton, outside Atlanta. After operating the coiler machine
for the companys Beautyrest mattress, he moved into maintenance and
kept all of the plants machinery humming.
Over the years,
as Simmons passed from one private equity firm to another, and as Mr. Rogers
became president of the local union at the plant, he saw little difference
on the plant floor. Then, in the spring of 2008, when the slowing economy
had begun to hurt sales, Simmons laid off the night shift at the Mableton
plant. And on Sept. 18 that year, it gathered employees in the cafeteria to
say that the plant was closing.
people were hurt because they thought this was a great company to work for
and they planned on spending the rest of their lives here. Their families
were here. They bought houses and cars here, Mr. Rogers recalled. After
this happened, people were really struggling.
closings and other cuts, Simmons let go of more than a quarter of its work
force last year, said its chief financial officer, William S. Creekmuir.
who received his union-negotiated severance package of two months pay,
said he and other union representatives had tried to get a little more for
workers, particularly those who would have been eligible for retirement. Simmons
had a long history of giving retiring employees a bonus of $20 for each year
worked and a free mattress set, Mr. Rogers said.
give us anything, he said.
In the months
after he lost his job, Mr. Rogers nearly lost his home to foreclosure and
struggled to pay his familys bills. Mr. Rogers, who eventually landed
a job at an air filter company and picked up part-time work doing maintenance
at an apartment complex, said Simmons bore little resemblance to the company
he once loved.
the picnics. They stopped the Christmas parties. They stopped the retirement
parties, he recalled. That showed you the type of people I was
working for. I just didnt realize it until the hard times came like
For now, the
Golden Age of private equity is over, the financiers say. In a speech to an
industry gathering last spring. Mr. Schoen said that bankers and bondholders
were reluctant to lend more money to the buyout kings.
in a brave new world, he said. We cant go back to where
we were, at least not in this investment cycle, and probably not in my career.
But some private
equity investors are searching for profits in the detritus of the buyout bust.
Simmons hopes to emerge from bankruptcy in the hands of two new private equity
firms. One is Ares Management, which owns the mattress giant Serta. Under
the plan, Simmonss debt would be more than halved, to $450 million,
in part reflecting the losses suffered by its existing bondholders.
its remaining employees face an uncertain future. Some in the industry predict
Ares will eventually merge at least part of Simmons with Serta, jeopardizing
has been a cash cow. Its made a lot of people a lot of money,
said David Perry, executive editor of Furniture/Today. But theres
a growing question in the industry of how many more times can this be repeated.
How much more juice can be squeezed out of the orange?