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H Partners Management, LLC ("H Partners"), the largest shareholder of Tempur
Sealy International, Inc. (the "Company" or "Tempur Sealy")
with an
approximate 10% stake, today sent a letter to Tempur Sealy shareholders urging
them to vote the BLUE proxy card "AGAINST" the re-election of CEO Mark
Sarvary, Chairman P. Andrews McLane, and Christopher A. Masto, Chairman of the
Nominating and Corporate Governance Committee, to the Tempur Sealy Board of
Directors (the "Board") at the 2015 Annual Meeting of Shareholders to be held
on May 8, 2015.
The letter to Tempur Sealy shareholders can be found at:
www.FixTempurSealy.com.
The full text of the letter is as follows:
April 17, 2015
Dear Fellow Tempur Sealy Shareholder:
H Partners Management, LLC (together with its affiliates, "H Partners", or
"we") owns approximately 10% of the outstanding shares of Tempur Sealy, making
us the Company's largest shareholder. We are long-term value investors, with
an average holding period of six years, and have held shares of Tempur Sealy
since 2012.
Tempur Sealy possesses all the components of a successful company:
industry-leading products, iconic brands that have stood the test of time, and
a talented team of dedicated employees. However, despite these positive
attributes, we believe the Company's stock is significantly undervalued due to
mismanagement by an entrenched and misaligned Board. Shockingly, over the past
three years, the Board has paid the CEO $18 million to oversee a $1.6 billion
loss in equity value and 140% underperformance versus the Company's peers.
Shareholders must now hold management and the Board accountable for their poor
performance, and compel the Board to implement meaningful change.
Send a clear message to the Board that shareholders demand immediate
leadership changes by voting the BLUE proxy card "AGAINST" directors
Christopher A. Masto, P. Andrews McLane and Mark Sarvary.
If you have any questions, please call our proxy solicitor, Innisfree M&A
Incorporated, at (888) 750-5834.
Shareholders Are Suffering From Dramatic Stock Underperformance
and Earnings Misses Due to Repeated Execution Errors
By any measure, Tempur Sealy stock has underperformed dramatically. Over a
one-, three- and five-year period, Tempur Sealy stock has significantly
underperformed the S&P 500 Index, mattress sector peers, and even a peer group
selected by the Board itself:
(For Tempur Sealy Underperformance, see additional multimedia)
This substantial stock underperformance is the result of a precipitous decline
in the earnings outlook of the business. The following chart shows that in
2012, the Board claimed that a stand-alone Tempur-Pedic business would
generate over $8.00 in EPS by 2016. Just eighteen months later in September
2013, the Board cut its outlook by half to only $4.00 in EPS – and this figure
even included a contribution from the newly-acquired Sealy. In February 2015,
a mere eighteen months after this material decline, the Board once again
reduced earnings expectations. In aggregate, long-term earnings expectations
have declined by 60% in the past three years.
(For 2016 EPS at Various Points in Time, see additional multimedia)
Earnings have declined drastically because the Board has overseen execution
errors in every single quarter for the past three years. While we believe
management and the Board have made numerous errors in categories such as
strategy, product development, cost control, financial management, and
manufacturing, two major chapters have come to define Tempur Sealy's poor
execution under CEO Mark Sarvary.
Poor Execution, Chapter 1: Apparent Complacency Leads to a Precipitous Decline
in the Tempur-Pedic Segment
Prior to CEO Mark Sarvary's arrival in 2008, other memory foam offerings
attempted to compete with Tempur-Pedic, but previous management successfully
blocked these new entrants by ensuring that the Company had the best quality
memory foam mattresses. Unfortunately, in 2011, the current Board and CEO
ignored two critical pieces of customer feedback: Tempur-Pedic mattresses (i)
had an outdated appearance, and (ii) were perceived to "sleep hot". These
issues were widely known; not surprisingly, a competitor pounced on these
deficiencies by introducing a sleek, modern-looking memory foam mattress that
responded to customer concerns by containing a layer of "cooling gel". This
new competitive mattress gained instant traction with customers, and started
to erode Tempur-Pedic's decades-long dominance in the memory foam segment.
Other copy-cat competitors replicated the same strategy, further eroding
Tempur's position. We believe the stock plummeted by 40% in 2012, and margins
in the Tempur segment have been cut by almost half, because management and the
Board were behind the curve and did not address deficiencies that it seems
could have easily been fixed.
Poor Execution, Chapter 2: Operational Missteps After Sealy Acquisition Lead
to Further Earnings Decline
Due to their complacency, management and the Board were already struggling
with a stand-alone Tempur-Pedic in 2012. Then, in 2013, Tempur-Pedic acquired
Sealy, a company that was significantly more complex in terms of operations
and manufacturing. This acquisition had vast potential, and the Board promised
substantial synergies and strategic benefits from the combination of these
iconic brands. However, since the Sealy acquisition closed, the frequency and
magnitude of these basic execution errors has accelerated. As shown in the
following chart, the Sealy acquisition has been extremely disappointing.
Instead of seeing improved results from promised synergies, shareholders have
observed further declines in earnings and margins over the past two years.
(For Combined Tempur Sealy Historical Earnings and Margin Trajectory, see
additional multimedia)
In aggregate, as a direct result, we believe, of the Board's complacency and
execution errors, operating margins have collapsed from a historical peak of
almost 20% to a mere 10.7% in 2014.
The Board Denies its Serious Mismanagement and Underperformance
We are troubled by the Board's defense of its extremely poor track record, and
we are concerned by the Board's attempts to mislead shareholders. As shown in
the following chart, the Board dismisses the disappointing reality of stock
underperformance, repeated execution mistakes, earnings misses, its failure to
properly integrate Sealy, the Company's declining profitability, and a CEO
whose pay is not aligned with performance.
(For The Board's Misleading Statements, see additional multimedia)
The Board Is Stale and Poorly Aligned with Shareholders
In our opinion, there are three key reasons why the current Board is apathetic
toward shareholder concerns:
First, no large owners sit on the board. The entire 11-person Tempur Sealy
Board owns a mere 1% voting stake. The lack of a large owner in the boardroom
means that no director suffers the economic consequences of poor performance.
Second, with an average tenure of ten years, the board is stale and dominated
by former private equity holdover directors who are clinging to leadership
positions on the Board. P. Andrews McLane, a Senior Advisor at TA Associates,
has been Chairman of the Board for the past twelve years, including six years
after his firm exited its investment in the Company. Christopher Masto, Vice
Chairman of Friedman Fleischer & Lowe, has served on Tempur Sealy's Board for
twelve years, and has served as Chairman of the Company's Nominating &
Governance Committee for the past five years, despite his firm's exit from its
initial investment in the Company in 2006.
Finally, Messrs. McLane and Masto appear to pursue personal agendas, contrary
to shareholder interests:
* Both Mr. McLane and Masto appear to benefit from opportunistic trading of
the Company's stock due to the special informational advantage they have
over public shareholders. Shockingly, a colleague of Mr. Masto's pled
guilty for insider trading in Tempur-Pedic stock based upon information
supplied by Mr. Masto. Despite his firm's involvement in this serious
criminal matter, Mr. Masto was subsequently promoted to Chairman of the
Nominating & Governance Committee, which oversees the Company's insider
trading policy. We believe that Mr. Masto's promotion reflects the Board's
poor judgment and blatant disregard for proper corporate governance.
* Just one year after TA Associates exited its investment, Tempur-Pedic
began sponsoring the U.S. Ski & Snowboard Association ("USSA"), an
organization on whose board Mr. McLane serves. The sponsorship appears to
primarily benefit Mr. McLane by elevating his stature within the USSA. We
also question whether the USSA sponsorship is a Related Party Transaction
that should have been disclosed. We believe that this lack of transparency
further reflects the Board's arrogance and misalignment.
Another Large Shareholder Supports Our "Vote AGAINST" Campaign
Chieftain Capital Management, a major shareholder of Tempur Sealy since 2010,
publicly disclosed that it has voted "AGAINST" every single one of the
Company's director nominees. Chieftain owns 3.5 million shares, or
approximately 6% of the outstanding stock. It is noteworthy that another
large, long-tenured shareholder sees through the Board's misleading and
self-serving rhetoric, and strongly supports our campaign. In addition, many
other shareholders have called us to express frustration with the current
direction of the Company, and are supportive of the changes that we seek.
Protect Your Investment:
Vote "AGAINST" Masto, McLane, and Sarvary on the BLUE Proxy Card
We urge you to immediately vote "AGAINST" Directors Masto, McLane and Sarvary
on the BLUE proxy card. The greatest risk to value is inaction by
shareholders. If we do not act now, we fear Tempur Sealy shareholders will
continue to suffer from underperformance under current leadership, which has
consistently failed to execute its own strategy.
We caution fellow shareholders to beware of the Board's misleading tactics and
false hope. The Board and CEO do not suffer the same consequences as
shareholders do – indeed, holding just 1% of Tempur Sealy's voting stock, they
do not have much skin in the game, and continue to receive millions of dollars
in fees regardless of stock underperformance.
For several years, we were patient and encouraging of management, despite our
growing concerns about their limitations and constant errors. In our
conversations with management and the Board, we were told that if we waited
only one or two more quarters, the Company would improve its performance.
Instead, however, performance has continued to sharply deteriorate, with
observed execution mistakes in every quarter for the past three years. We can
no longer afford to sit idly by as this once-great Company falls further into
mediocrity.
* * * *
As Tempur Sealy's largest shareholder, we have a singular objective – to help
the Company achieve its full potential, both in terms of earnings and stock
price. Our interests are fully aligned with the interests of all Tempur Sealy
shareholders.
We strongly believe that Tempur Sealy can be a great Company once again if the
true owners of Tempur Sealy take the necessary steps to maximize the value of
our investment.
SEND A MESSAGE TO TEMPUR SEALY'S BOARD THAT CHANGE IS NEEDED –
VOTE AGAINST MASTO, MCLANE AND SARVARY TODAY
Thank you for your support.
Sincerely,
H Partners
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