SIMMONS BEING PUT TO REST
The New York Times reported today that Simmons Beautyrest mattress is headed for Bankruptcy. Simmons has changed hands seven times in little more than two decades,
After being owned for short periods by a parade of different investment groups or private equity firms, which try to buy undervalued companies, mostly with borrowed money, and as part of the investment “strategy”, liquidate the company, at the expense of creditors and investors.
For many of the company’s investors, the sale will be disastrous. Its bondholders alone stand to lose more than $575 million. Not only will the demise of the company affect bondholders, the company’s downfall has also devastated employees who will have been or will be laid off.
But Thomas H. Lee Partners of Boston, its present owner, it has not only escaped unscathed, it has made a profit. The investment firm bought Simmons in 2003 and has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars in “speical dividends” from the company. The New York Times also reported that 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.
At the same time as the Wall Street investment banks were cashing in, collecting millions for helping to arrange the takeovers and for selling the bonds that made those deals possible, making around $750 million in profits from Simmons over the years, the company was driven into insolvency by putting Simmons deeper into debt. The financial dealings resulted in Simmons borrowing d more and more money to pay ever higher prices for the company, enabling each previous owner to cash out profitably.
An otherwise healthy company, Simmons was weightened down and today owes $1.3 billion, compared with just $164 million in 1991.
The strategy of private equity firms did at Simmons, and scores of other companies like it, eerily reflected the boom and bust of subprime mortgage meltdown. Fueled by easy money from 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.
These private 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, leveraging the company’s assets as collateral — For the financiers, the rewards were enormous. For the company the effects were devastating.
Just as with the housing market, the good times ended when the economy fell into recession and the credit markets froze, and the investors were no longer able to refinance or leverage the assets of the company. With the recession, Simmons is now groaning under a huge amount of debt at a time when its sales are slowing. And the game of refinancing and leveraging is over.
Simmons, however, is unfortunately not a unique phenomenon. According to Standard & Poors, more than 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. Among them are household names like Harrahs Entertainment and Six Flags, the theme/amusement park operator.
This brings up the question of what is the liability, if any, of the investment companies to shareholders when a company is systematically drained of equity. Perhaps the bankruptcy code should be amended to consider profits like these to insiders as a preference, recoverable by the Bankruptcy Trustee.
