• by Thom Forbes  @tforbes, August 8, 2016

Steinhoff, a discount retailer based in Cape Town, South Africa, with global ambitions, is buying Mattress Firm Holding Corp., the Houston-based company that in February closed a deal with HMK Mattress Holdings LLC, the holding company of Sleepy's, for $780 million.

That transaction “has bolstered sales but also resulted in rising costs” for Mattress Firm, reports Alexandra Wexler for the Wall Street Journal. It “warned in June that it expected a loss for the fiscal year as it moved to rebrand all its stores under the Mattress Firm banner.”

Indeed, “shares of Mattress Firm had declined 52% in the past year as slumping demand for retail products and discounting weighed on its results. The company had a market capitalization of about $1.11 billion,” Bloomberg’s Julie Johnsson writes. 

Steinhoff is paying $64 per share — a premium of about 115% over Mattress Firm's Friday close — in a deal valued at $3.8 billion including debt, according to a release announcing the deal, which is expected to be completed around the end of the third quarter.

“Mattress Firm, founded in 1986, has approximately 3,500 stores across 48 states with 80 distribution centers,” reports Reuters’ Mike Stone. “Steinhoff is a German-listed $22 billion furniture conglomerate led by South African retail mogul Christo Wiese who is also Steinhoff's chairman and largest shareholder.”

It owns more than 40 brands in 30 countries in Africa, Australia, the U.K. and across Europe, and “last month agreed to pay nearly $800 million for British-based discount chain Poundland after two previous attempts to expand in Europe fell through this year.”

Called “Africa’s Ikea,” it was founded in 1964 by Bruno Steinhoff, who started by selling cheap furniture from West Germany to East Germans in 1964, reports the WSJ’s Wexler. “The fall of the Berlin Wall in 1989 put Mr. Steinhoff in a position to tap a growing consumer class in Eastern Europe.” In 1997 it acquired a stake in a South African furniture company and got listed on the Johannesburg Stock Exchange the following year.

“This transaction will allow Steinhoff to not only enter the U.S. market with an industry leading partner and a national supply chain, but it will also expand Steinhoff’s global market reach in the core product category of mattresses,” Steinhoff CEO Markus Jooste says in the release.

Mattress Firm will operate as a subsidiary of Steinhoff and remain in Houston. Steve Stagner, its executive chairman and chairman of the board, and Ken Murphy, who succeeded Stagner as president and CEO in March, will remain in their positions, with Stagner joining Steinhoff’s executive committee.

“Mattress Firm has 3,594 locations across the country and about a 25% market share amongst mattress specialty retailers in the U.S.” with 2015 sales of nearly $3.81 billion, reports Olivia Pulsinelli for the Houston Business Journal. Besides Sleepy’s, it acquired Mattress Giant in 2012 and Sleep Train and other companies in 2014.

After reporting a $119 million loss in the first quarter, Murphy “outlined plans to close some of its inefficient and often duplicative stores. In Houston, and many other markets, there are Mattress Firm stores within blocks of each other,” points out Ileana Najarro for the Houston Chronicle.

Besides the overabundance of physical outlets, the stores face stiff online competition.

“Ecommerce sales are expected to increase by 13% in 2016, while overall U.S. retail sales are projected to rise by just 2%, according to a report by eMarketer,” points out Arash Massoudi for Financial Times. 

And prices can be substantially lower online.

“The mattress industry is largely a sales job,” the Houston Chronicle’s Najarro continues, reporting that margins are as high as 50%. “One of Mattress Firm's marketing strategies is ‘Replace Every 8,’ telling customers they should replace their mattresses every eight years.”

And to help consumers do so, “we even put a ‘delivered-on’ date on all our new mattresses, so you’ll know when it’s time to replace it in the future,” the voiceover tells us in this spot for its Dreams brand in the U.K.

A bit fluffy, no?