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Are you surprised that the FTC blocked the TSI/Mattress Firm deal?

Are you surprised that the FTC blocked the TSI/Mattress Firm deal?

The FTC’s decision to block Tempur Sealy International’s acquisition of Mattress Firm took many in the industry by surprise on July 3.

On a conference call on Monday, Scott Thompson gave a short speech, mostly reading the already-released press announcement, and added:

“As part of this transaction, we have committed first to make a substantial divestiture of stores and supporting infrastructure to rapidly growing the U.S. mattress retailer. Second, to maintain floor slots at Mattress Firm for third party brands and third to take additional actions. Our slot commitment ensures a portion of the floor will be reserved for the best non Tempur Sealy products in the market. We’ve successfully engaged with numerous Mattress Firm suppliers on post merger supply agreements, and have executed several, including one with a supplier who does not currently supply Mattress Firm.”

What is the process from here? Thompson says the company is still evaluating the lawsuit to better understand the next step for their case. Hearing dates have not yet been set, but he expects those to proceed in the next few months.

“What is the probability of success?” he addresses in the call. “We believe we have a very strong case based on the facts and law.

Because they are trying the case in court, and not in public, he could not answer any questions related to strategy. However, he does think it will take a relatively short time to get to judgment.

“Vertical mergers do not eliminate head-to-head competition and, compared to horizontal mergers, are more likely to generate efficiencies that prevent anticompetitive effects,” FTC commissioner Melissa Holyoak said in a statement. “For example, vertical mergers often benefit consumers through the elimination of double marginalization, which tends to lessen the risks of competitive harm.” Despite the increased likelihood of procompetitive effects from vertical mergers, they may still result in harm in some circumstances. Consistent with these well-established economic principles, I vote in favor of filing this complaint based upon the substantial evidence generated by staff’s thorough investigation, especially the parties’ own ordinary-course documents. I have reason to believe that the effect of Tempur Sealy’s acquisition of Mattress Firm “may be substantially to lessen competition.”

Much of the 45-page complaint is blacked out and kept private. But while it is primarily focused on the Mattress Firm acquisition, it reveals several other ways TSI attempted to block or restrict competition in the past.

“By owning Mattress Firm, Tempur Sealy would wield significant power over its
rivals and could cut or limit their access to this critical retail channel,” the complaint states. “Indeed, Tempur Sealy’s desires to protect its dominance and suppress competition rank among the company’s chief reasons for pursuing the Proposed Acquisition. On the front of a May 2022 presentation analyzing the Proposed Acquisition — code-named Project Lima — Tempur Sealy’s CEO wrote that acquiring Mattress Firm would enable Tempur Sealy to both ———”

The rest of the sentence is cut off, but it then goes on to say that these documents are not one-off statements. “Multiple high-ranking executives within Tempur Sealy have expressed a desire to eliminate and block rival mattress suppliers and brands from Mattress Firm post-acquisition.”

Those rival suppliers specifically cited in the complaint include Serta Simmons Bedding and Resident Home.

Moreover, the complaint says Tempur Sealy has already locked up access to many of the next-largest premium mattress retailers through anticompetitive agreements that forbid them from carrying particular mattress brands or require Tempur Sealy to occupy a dominant portion of the sales floor.

“Post-acquisition, Tempur Sealy would have a strong financial incentive to do exactly what it has been planning to do: disfavor rival mattress suppliers to sell more of its own brands,” the complaint says. “The combined company would earn a much greater margin on each Tempur Sealy product sold at Mattress Firm than it would earn on a non-Tempur Sealy product. By favoring its own products at the expense of rival mattress suppliers, Tempur Sealy could generate hundreds of millions of dollars in additional revenue, while damaging competition in the market and inflating costs for everyday Americans.”

This echoes the fear many in the mattress industry had when this deal was first announced. For the FTC to block this — 5-0, nonetheless — is a huge deal in the industry.

“Tempur Sealy has sought to suppress competition by restricting other premium mattress brands from accessing Mattress Firm stores,” the complaint reads.

It later goes on to say, “Since resuming its relationship with Mattress Firm in 2019, Tempur Sealy has, in fact, endeavored to —— and other mattress brands by keeping them out of Mattress Firm stores. These prior efforts offer a preview of how Tempur Sealy would use its control over Mattress Firm to block rivals and harm competition.”

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It further claims that TSI may limit competition by expelling any brand
that poses a threat, as high-level executives within the company have explicitly discussed eliminating two brands from Mattress Firm post-acquisition.

“Moreover, Tempur Sealy already has used its existing dominance to block or limit
rivals’ access to many other major retailers of premium mattresses,” the complaint continues on page 32. “Through a variety of agreements with those retailers, Tempur Sealy has: (a) secured a substantial number of slots for its own products; (b) converted some retailers to TSI-only or TSI-dominant status; and (c) prohibited some retailers from carrying mattresses supplied by particular competitors.”

They list several examples of these stores, but the information is kept private.

Tempur Sealy responded in a release by saying, “The bedding industry is highly competitive, offering consumers a diverse selection of products, brands, price points, and purchasing channels. There are thousands of brick-and-mortar storefronts across the United States where consumers can purchase bedding products, only a small fraction of which are operated by Mattress Firm. Additionally, brick-and-mortar retailers and direct-to-consumer bedding brands sell millions of bedding products online each year.

“We continue to believe the combination of Tempur Sealy and Mattress Firm will unlock incremental benefits for all stakeholders, particularly consumers,” it continues. “Mattress Firm’s strong retail presence complements Tempur Sealy’s manufacturing capabilities, facilitating more targeted innovation, improving the customer experience, and broadening our U.S. omni-channel platform. Additionally, we expect to achieve synergies by leveraging our global scale and vertically integrated infrastructure to drive efficiencies through logistics, product lifecycle management, manufacturing optimization and sourcing initiatives. All of these factors will allow us to further execute on Tempur Sealy’s mission to improve people’s lives through better sleep.”

When plans for this acquisition were first announced, it seemed that the deal may well pass through the FTC with no issue. That certainly was the narrative TSI was driving.

But with all of this information now coming to light and a court case to follow, it appears the industry may have avoided a near catastrophe — for now. The issuance of the complaint marks the beginning of a proceeding in which the allegations will be tried in a formal hearing before an administrative law judge.

This article was updated July 8.

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