Somnigroup International wields significant leverage in its blockbuster proposal to acquire industry supplier Leggett & Platt, but it also faces the prospect of “significant pushback” from key L&P customers, an industry analyst says.
Piper Sandler analyst Peter Keith, who has followed both companies for years, admitted in a note shortly after the news broke this morning that the $12 a share proposal “comes as a surprise to us.” But he nonetheless offered his quick take on the news.”
“We question if Leggett & Platt’s board is open to selling at $12 a share,” Keith wrote, “but it may not have a choice if SGI were to eventually walk away from Leggett & Platt as an innerspring supplier (and complete its vertical integration move through another acquisition or building its own spring facilities).”
Leggett & Platt is the primary innerspring supplier to SGI, and SGI is one of Leggett & Platt’s biggest customers, Keith noted. The two companies have enjoyed “a very long-term relationship.”
He wrote that the proposed acquisition “will also have ripple effects across the industry and will likely face regulatory scrutiny with significant pushback from key Leggett & Platt customers.”
The acquisition “has potential to be nicely accretive to SGI over time. Additionally, it makes SGI even more vertically integrated, and SGI is likely buying L&P near a cyclical bottom for many of its key business lines,” Keith added.
The all-stock transaction is proposed at $12 a share, which represents a 30% premium to Leggett & Platt’s stock price over the last 30 days, he wrote.
Keith said he suspects that 30% premium “is disappointing” to the Leggett & Platt board, “but would likely be welcomed by Leggett & Platt shareholders. Also, if L&P’s board rejects the proposal, we believe L&P runs the long-term risk of losing its supply relationship with SGI, which is likely critical. In its letter to L&P, SGI noted the combination of SGI and L&P would allow its existing long-term relationship to continue without interruption.”
He said that acquiring Leggett & Platt “would allow SGI to become even more vertically integrated, and it is potentially a faster and less complicated way for SGI to manufacture its own innersprings (versus spending several years building its own spring factories). L&P would continue to operate independently within SGI, although we would expect additional business lines to get divested.” He also said the acquisition “would further enhance SGI’s competitive positioning.”
Evaluating L&P’s position in the marketplace today, Keith said that in the last several years, L&P “has seen business fundamentals pressured as a result of increased innerspring competition coming from both European suppliers and new spring facilities built in the U.S.
L&P has also had trouble integrating its specialty foam business, Elite Comfort Solutions, which it acquired before Covid. More recently, and following SGI’s acquisition of Mattress Firm, L&P lost the private label Sleepy’s foam mattress contract for Mattress Firm, and it also lost its adjustable base supplier relationship to Mattress Firm. L&P remains the largest innerspring supplier in the U.S. and is a supplier to many of SGI’s competitors.”
