AndreyPopov
The Federal Trade Commission’s lawsuit on Tuesday to block Tempur Sealy’s (NYSE:TPX) planned $4 billion purchase of Mattress Firm removes an overhang on Tempur Sealy’s stock, according to a Piper Sandler analyst.
The regulator issued an administrative complaint and authorized a lawsuit in federal court to prevent the deal, alleging that Tempur Sealy — the world’s largest mattress supplier and manufacture – will have the ability and incentive to “suppress competition” and raise prices for mattresses, the FTC said in a statement on Tuesday. The Commission voted 5-0 to authorize the lawsuit to challenge the transaction.
“Bottom-line, we think TPX shares currently look attractive with or without the Mattress Firm acquisition,” Piper Sandler analyst Peter Keith wrote in a note on Tuesday. “We still expect TPX to pursue litigation and ultimately win in court.”
Even if the purchase is eventually blocked, TPX remains attractive as a “dominant market share gainer at the bottom of the industry cycle” with potential to repurchase 10-15% of outstanding shares over the next 12 months, Keith, who has an overweight rating and $61 price target on TPX, added.
Tempur Sealy (TPX) appears to have a sound legal argument to challenge the FTC as it has signed supply agreements with all but one existing Mattress Firm supplier, Piper’s Keith noted. Keith also pointed out that TPX will have no issue divesting 200 stores that may raise competitive concerns in specific markets.
Tempur Sealy’s (TPX) best argument may be that a combined Tempur Sealy/Mattress Firm could be a strong competitor to Amazon (AMZN), which has “quietly become the most dominant mattress retailer in the industry” with an estimated 30% share of industry units, Keith wrote.
“A combined TPX/MFRM would present a stronger challenger against AMZN – particularly in the lower-end (<$500 price points) market,” Keith added.
Wedbush analyst Seth Basham believes there is more than 50% probability that the deal is successful and overcomes the FTC court challenge. In the event TPX is unable to consummate the deal, he sees the potential for a levered buyback for as much as ~12% of shares. Basham has an outperform rating and $66 price target on Tempur Sealy (TPX).