(Bloomberg) -- Sleep Country Canada Holdings Inc. shareholders are weighing whether they’ll vote in favour of Fairfax Financial Holdings Ltd.’s takeover bid, a deal that analysts say is well-timed for the buyer.
Canada’s largest mattress retailer announced the friendly $35-per-share offer a week ago. That’s a 28% premium to the previous closing price, but it’s below where the stock was in early 2022. The deal comes in the midst of tough environment for the company, with a slow housing market and high borrowing costs hurting consumers.
Samir Taghiyev, portfolio manager for Canadian small-cap equities at Mawer Investment Management, said the timing is “not the most ideal,” though he sees the price as being close to fair. Mawer is one of the largest Sleep Country shareholders, according to data compiled by Bloomberg, holding about 5% of the shares as of the end of June.
“This is a time where the valuations are depressed due to the high interest rates, but also the demand for mattresses and revenues for Sleep Country are depressed and the margins are depressed,” he said. “So over the long term, when those trends revert or normalize, Fairfax should be getting a very good deal.”
Shares of Sleep Country were slightly above $35 in afternoon trading in Toronto on Monday — suggesting that some traders see at least a chance that Fairfax will have to bump its bid higher.
Stifel analyst Martin Landry said in a note to clients that Fairfax’s offer seems “slightly opportunistic,” with Sleep Country’s earnings not yet running at a normal level. He expects the deal will be approved by shareholders, even though a higher valuation may be warranted.
Mattress sales have slowed since the pandemic as consumers deal with inflation and higher rates. Sleep Country shares reached nearly $41 in November 2021, but closed at $27.28 before the takeover offer.
Analysts are forecasting the company to earn $2.09 per share on an adjusted basis this year, which would be about 26% lower than two years ago, according to data compiled by Bloomberg. Profitability is expected to recover to $2.90 per share by 2026 as the economy and housing gain momentum.
If that happens, Fairfax will reap the benefit. Still, Sleep Country management highlighted the ability for shareholders to lock in returns by accepting the cash offer now. “We are pleased to have reached an agreement that provides certainty of significant and immediate value to shareholders,” Christine Magee, chair and co-founder of Sleep Country, said in the release announcing the deal.
Sleep Country’s board reached an agreement with Fairfax after direct negotiations and didn’t conduct an extensive auction process, according to analysts. A strategic buyer is unlikely to come forward with a competing bid, Landry said in his note.
At least two-thirds votes cast by shareholders must support the deal for it to move ahead. Sleep Country is expecting the acquisition to close in the fourth quarter of 2024. Fairfax did not respond to a request for comment.
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