A Mattress for All Seasons – Steinhoff buys Mattress Form, Vindicates Contrarian Stock Pick
They say the best investors find opportunities in the worst circumstances. While others are afraid of catching a falling knife, they’ll step in and see that it’s only just about to stop in a butcher-block. Or, In this case, the mattress. The South African retailer, Steinhoff, announced a bid today for the equity and assumed debt of Mattress Firm Holding Corp. (MFRM) at a 115% premium to yesterday’s closing stock price. For a select few hedge fund managers, it’s provided a welcome boost to returns.
Steinhoff is a South African retailer that sees the $3.8b acquisition as an important source of diversification from its weakened domestic market. Steinhoff’s acquisition strategy has already shifted its revenue concentration to Europe, where it sources more than two-thirds of its $11b in annual revenue. The acquisition of Mattress Firm will mark Steinhoff’s first foray into North America and will form the world’s largest mattress distributor. Says Richard Chamberlain, an analyst at RBC, “We think Steinhoff is paying a strategic premium to allow it to enter the US market with an industry leading partner.”
To say that most hedge funds did not see this coming would be an understatement. It is a contrarian position. Just over twenty hedge funds held a position in Mattress Firm as of the last filing date. An analysis of flows illustrates that hedge funds, more broadly, were selling, as of the latest disclosure. Flows of Mattress Firm holdings from hedge fund managers with high StockAlpha, a measure of a manager’s stock-picking skill, were in the opposite direction. They were buyers, and their purchases were also driving the consensus score higher — a measure of a position’s popularity among hedge funds. Simply put: Mattress Firm was becoming more popular with the smart-money.
Today, the contrarian investors in Mattress Form were vindicated. Steinhoff’s decision to expand to the US market through acquiring Mattress Form mirrored the prospective analysis firms like Pivot Point must have been making when they invested in Mattress Form.
Who were these managers?
Anthony Brenner’s Pivot Point was one. Pivot Point manages a book that concentrates 100% of its holdings in the top ten positions. Their StockAlpha measures over the past three years have been weak, but the effect of the acquisition should have a meaningful impact on returns. Mattress Form is a position that accounts for more than 10% of their publicly disclosed portfolio, so on an unhedged basis, it the 115% move would meaningfully impact their portfolio. As of the latest disclosure, Brenner had increased his exposure to Mattress Form by almost 25,000 shares.
Brenner’s Pivot Point may have had the most concentrated position, but they were not alone. Both Davidson Kempner and Coatue Management recently initiated positions in Mattress Form, as of the most recent disclosure date. Davidson Kempner acquired 163,607 shares, and Coatue stepped into a position that entailed 415,354 shares, which would be worth more than $35m as of today’s acquisition price. Though these were not as concentrated bets as Pivot Point’s, Coatue’s recently-initiated position was more than twice it’s size. Additional holders are listed below.
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