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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. The
letter urges shareholders 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.
On April 28, 2015, Tempur Sealy announced yet another underwhelming quarter
that continued to show management's inability to grow earnings, improve
margins or effectively integrate Sealy:
* Another Decline in Earnings: Yet again, sales growth failed to translate
into earnings growth – an additional $38 million in sales resulted in a $1
million decline in Adjusted EBITDA. This decline in earnings occurred
despite the fact that the Company's first quarter 2014 earnings were
depressed due to significant product launch costs, which H Partners
believes should have created a favorable comparison.
* Increasing Add-backs and Adjustments: It should concern all shareholders
that management appears to be increasingly reliant on adjustments and
add-backs to create the appearance of higher earnings ahead of the Annual
Meeting. On yesterday's earnings call, the Company revealed that
"integration costs" were almost twice the level reported in the first
quarter of 2014. This is surprising in light of the Company's earnings
call on February 5, 2015, in which Tempur Sealy management claimed that
Sealy's integration was "essentially complete," implying that integration
costs should decline, rather than increase. In the absence of this
surprising add-back, Adjusted EBITDA in the first quarter would have
declined by over $12 million, and Adjusted EPS would have fallen $0.06
short of consensus estimates.
* Failure to Integrate Sealy: Management also disclosed yesterday that the
"non-recurring" integration cost adjustments, which have been a persistent
feature of the Company's financial results over the past two years, will
continue well into 2016. It is troubling that, after spending more than
$70 million to integrate Sealy over the past two years, management still
cannot provide detail to shareholders on the financial impact as the
process continues. Since Sealy was acquired in March 2013, Adjusted EBITDA
has declined from $425 million to $404 million, with no evident synergies.
* Inability to Meaningfully Improve Margins: Even when adjusting for foreign
currency impacts and supposed "integration costs," Adjusted EBITDA would
have increased by only $7 million, compared to an increase in sales of $66
million. This implies that the incremental Adjusted EBITDA margin for the
first quarter of 2015, even giving management the full benefit of all
add-backs and currency effects, was a mere 11%. This contribution margin
falls well short of the Company's historical EBITDA margins, which have
been in excess of 20%.
Usman Nabi of H Partners said, "As demonstrated by the underwhelming first
quarter results, chronic underperformance and mismanagement continue to plague
Tempur Sealy under Mark Sarvary's leadership. We caution shareholders to be
wary of another attempt by management to create false hope. To protect your
investment in Tempur Sealy, it is absolutely critical that shareholders vote
the BLUE proxy card today to send a clear message to the Board that immediate
change is needed, so that the remaining Board members understand that
shareholders will not tolerate any delay in acting on this referendum."
Per Tempur Sealy's Bylaws, any director who does not receive a majority of the
votes cast "for" his or her election must promptly tender his or her
resignation to the Board.
The letter to Tempur Sealy shareholders can be found at:
www.FixTempurSealy.com.
The full text of the letter is as follows:
April 29, 2015
Dear Fellow Tempur Sealy Shareholder:
The May 8, 2015 Annual Meeting of Tempur Sealy is only about a week away. We
appreciate the tremendous support we continue to receive from shareholders in
our campaign to reinvigorate leadership by voting "AGAINST" the three Board
leaders most directly responsible for value destruction: Christopher A. Masto,
P. Andrews McLane and Mark Sarvary.
H Partners' Campaign is Strongly Endorsed by Three Leading Proxy Advisory
Services
We are also deeply gratified by the resounding support we have recently
received from three leading independent proxy advisory firms – Institutional
Shareholder Services Inc. ("ISS"), Glass Lewis & Co., LLC ("Glass Lewis") and
Proxy Mosaic, LLC ("Proxy Mosaic"). Each firm concluded that our framework for
change at the Company is far preferable to the troubling status quo under
Tempur Sealy's current leadership, and has recommended that shareholders vote
"AGAINST" the three Board leaders we have identified. Not only have these
independent proxy advisory firms recommended against the re-election of
certain entrenched directors, but they have also taken the extraordinary step
of recommending against a standing CEO. In so doing, they have endorsed our
call to immediately replace Mr. Sarvary. We urge fellow shareholders to follow
the lead of ISS, Glass Lewis and Proxy Mosaic by voting on the BLUE proxy card
today "AGAINST" Directors Masto, McLane and Sarvary.
We firmly believe that 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, under
the watch of an entrenched and misaligned Board, the Company has been led
astray by an ineffective CEO.
It is now up to us, as owners of Tempur Sealy, to hold management and the
Board accountable for their poor performance, and to compel the Board to
implement meaningful change. No matter how many or how few shares you own, we
urge you to send the strongest message possible to the Board by voting at the
2015 Annual Meeting. The Board must clearly understand the call to action at
hand, and that we as shareholders will not tolerate any delay in acting on
this referendum. Join us in sending an emphatic directive to the Board by
voting the BLUE proxy card today against Directors Masto, McLane and Sarvary.
This is an exciting and defining moment for our Company, and with your
support, we can lay the foundations for Tempur Sealy to achieve its full
earnings potential. The 2015 Annual Meeting is the only opportunity
shareholders will have for the next twelve months to collectively have our
voices heard through an official voting forum.
As you reflect on this important decision, we urge you to take into account
the independent findings and conclusions reached by ISS, Glass Lewis and Proxy
Mosaic, whose recommendations validate our platform for reinvigorating
leadership at Tempur Sealy:
On the Weak Financial Performance Overseen by CEO Mark Sarvary*
* "The most telling statistic of the last three years…is that shareholders,
for all the additional risk they've taken on…have still witnessed no
improvement in the bottom line." – ISS
* "Ultimately, we believe shareholders seeking to mitigate the decidedly
negative impact associated with more recent portions of Mr. Sarvary's
tenure – which have, again, been marked by strategic miscalculations, poor
cost controls, lackluster integration efforts, faulty guidance, damaged
investor confidence and clear underperformance – must actively effect
significant change at the board level." – Glass Lewis
* "Despite Management's lofty claims of ‘strong performance' and
‘year-over-year improvements in important financial measures,' CEO Mark
Sarvary's tenure has been marked by declining performance and decaying
margins, threatening the Company's competitive position as the leader in
the premium mattress sector." – Proxy Mosaic
On the Poor Corporate Governance Overseen by Directors P. Andrews McLane and
Christopher A. Masto*
* "Neither McLane nor Masto have industry operating experience: both [are]
from private equity firms which were once invested in Tempur-Pedic, and
stayed on the board years after those firms exited their positions. Each
has been a director for more than a dozen years now…they would seem to
bear responsibility not only for tolerating the poor preparedness leading
up to 2012, but [also] for enabling the poor performance since then." –
ISS
* "Rather than confront many of these issues with what we would regard as
objective, relative analyses and cogent explanations, we find the board's
response is mired in selective analyses, half-step remedies and continued
assurances that there will be imminent value creation for independent
investors." – Glass Lewis
* "A poor corporate governance structure has neglected to hold Mr. Sarvary
accountable for numerous execution errors, such as the continued expansion
into tangential product lines and failed expansion in Europe. The
Company's supposed ‘best-in-class' corporate governance consists largely
of doing the bare minimum, and the Company's lack of oversight of related
party and insider transactions raises significant concerns." – Proxy
Mosaic
Their Endorsement of H Partners' Framework*
* "[H Partners] also provides an extensive analysis of how a
properly-motivated leadership team could meaningfully address the
company's poor performance – chiefly, by redressing flaws in five areas:
recruiting a capable CEO, reorganizing to an appropriate organizational
structure, focusing its strategy, align[ing] management with shareholders
through appropriately stretchy goals, and improving the clarity of its
communications." – ISS
* "While we recognize H Partners' solicitation framework is atypical, we
believe it is particularly necessary here, given that the sitting
directors have expressly backed both Mr. Sarvary's continued service and
the pursuit of a forward operating strategy that appears to display a
fairly limited degree of hindsight. Given the Company's well-documented
struggles – particularly over the last three years – we believe all
investors would benefit from sending a clear message that maintenance of
the status quo represents an inadequate resolution to the extensive
concerns detailed by H Partners." – Glass Lewis
* "The Company's assertion that the Dissident has ‘outlined no constructive
steps to enhance the Company's strategy' indicates either a fundamental
misunderstanding of the Dissident's plan or a blatant attempt to mislead
shareholders into believing that H Partners is somehow unprepared for the
challenges at Tempur Sealy. On the contrary, the Dissident has crafted a
five-step plan to restore value that suggests a strong grasp of not only
the Company's history of strategic missteps but, more importantly, what
actions must be taken going forward…Shareholders should feel comfortable
that the Dissident has executed this blueprint before, to great effect." –
Proxy Mosaic
By voting the BLUE proxy card "AGAINST" Directors Masto, McLane and Sarvary,
you will send a clear message that the status quo is unacceptable and that you
expect the Board to immediately implement H Partners' recommended leadership
changes. We look forward to advancing the interests of all shareholders.
If you have any questions on how to vote the BLUE proxy card, please contact
our proxy solicitor, Innisfree M&A Incorporated, at (888) 750-5834.
Thank you for your support.
Sincerely,
H Partners
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