Fairfax Financial to Acquire Sleep Country for $1.7 Billion

Sleep Country Canada Holdings Inc. says it has agreed to be sold to Fairfax Financial Holdings Ltd. for around $1.7 billion.

The deal announced on July 22 would see a subsidiary of the Toronto-based financial holding company acquire all issued and outstanding common shares of Sleep Country for $35 per share.

A press release announcing the agreement did not detail Fairfax’s plans for the mattress retailer, which is also headquartered in Toronto and counts 307 stores and 18 warehouses across its collection of brands. Those brands include retailers Sleep Country and Dormez-vous, bed-in-a-box companies Endy, Casper Canada and Silk & Snow, premium bedding chain The Rest and blanket company Hush.

Sleep Country president and chief executive Stewart Schaefer said the transaction “clearly demonstrates the value and strength of our brands and organization.”

Sleep Country, which was founded 30 years ago, has become a household name in Canada, but faced increased competition in recent years with the growth of online companies selling boxed mattresses they deliver to homes. Shoppers have simultaneously been putting off big-ticket purchases like mattresses lately because of high inflation, borrowing costs, and mortgage rates.

Martin Landry, Stifel’s managing director of equity research, said he understands Monday’s transaction came about because of a “one-off inbound” from Fairfax rather than Sleep Country kicking off a sales process.

However, he told investors in a note that he thinks Sleep Country has likely had several discussions with private equity firms in recent years because of its depressed share price.

The Friday before the deal was announced, Sleep Country’s share price closed at $27.28, significantly lower than November 2021, when it traded around $40.

News of the deal pushed Sleep Country’s share price up almost 28 percent, or $7.51, to $34.79 in Monday morning trading. Fairfax’s share price rose less than one percent to $1,599.91.

Mr. Landry says he thinks the valuation attached to the Fairfax deal is “slightly opportunistic” considering Sleep Country is a prominent player in the Canadian mattress industry with an estimated 40 percent market share.

“The company is well entrenched, allowing it bargaining power with mattress manufacturers,” he wrote. “This translates into much higher profitability than other North American retailers in the bedding industry.”

Christine Magee, who co-founded Sleep Country and now chairs a special committee of independent directors, positioned the deal as the product of “extensive negotiation” and a comprehensive assessment process.

She said in a press release she feels it will provide “immediate value to shareholders” who she thinks will see the deal as “fair” and in their “best interests.”

Fairfax is best known for providing reinsurance and property and casualty insurance in Canada, the United States, and other international markets.

The business run by billionaire Prem Watsa, who is referred to as the “Canadian Warren Buffet,” often dabbles in retail deals. Fairfax bought Toys “R” Us Canada in 2018 for $300 million after the toy store chain reorganized under the Companies’ Creditors Arrangement Act. (Fairfax sold the business to HMV-owner Putman Investments in 2021.)

Fairfax inked a deal in 2022 to purchase and take private Recipe Unlimited Corp., a Vaughan, Ont.-based company behind more than 20 restaurant brands including Swiss Chalet, Harvey’s and The Keg.

It has also owned athletic retailers Sporting Life and Golf Town.

The Sleep Country deal will only add to Mr. Watsa and Fairfax’s retail prowess.

Mr. Watsa, chairman and chief executive of Fairfax, said in a press release that his company looks forward to working with Mr. Schaefer and Sleep Country “to further develop this remarkable Canadian success story over the long term.”

Sleep Country has also left the door open to entertain other offers. It says the deal gives the business the right to terminate the agreement and accept a superior proposal in some unspecified circumstances, though Fairfax will have the right to match any offer.

In the event a better suitor surfaces and Sleep Country takes its offer instead, the company will pay Fairfax a termination fee of $36.5 million.

“We believe that there are only a limited number of strategic players capable and interested in acquiring Sleep Country,” Mr. Landry wrote in his note.

“Tempur Sealy is the obvious strategic player that comes to mind. However, the timing for Tempur Sealy is not optimal as the company is dealing with antitrust concerns while trying to close the acquisition of Mattress Firm.”

Should Sleep Country continue to move forward with Fairfax, it expects the deal to close in the fourth quarter of 2024. The agreement is subject to court approval and other customary conditions, including a shareholder vote.

Once completed, Sleep Country says it will apply to have its common shares delisted from the Toronto Stock Exchange.