A planned merger of two large U.S. mattress companies will force antitrust regulators to decide how much concentration they are prepared to allow in this once diffuse market.
Tempur-Pedic International Inc, an upstart from Kentucky that rules the market for pricey space-age foam mattresses, has offered to pay $242 million for century-old Sealy Corp, taking on about $750 million in Sealy's debt in the process.
The Federal Trade Commission, which is assessing the deal to ensure it complies with antitrust law, could make a decision on the case as soon this week, antitrust sources said.
In deliberating on the deal, the FTC is looking at an industry in transition.
As recently as five years ago, no mattress company had a market share above 20 percent. But a combined Sealy-Tempur-Pedic, along with Serta and Simmons, which have had common ownership since 2009, would mean that two companies would effectively control more than 60 percent of the U.S. market.
Among antitrust experts polled, four expected the deal to be approved, two felt the FTC could ask for asset sales to let the deal go through, and one thought the FTC could go either way.
The industry publication Furniture Today showed that in 2011, the longstanding troika of U.S. mattresses was still in effect: Serta had an 18.1 percent share, Sealy was at 17.8 percent, and Simmons was third with 15.7 percent. Furniture Today calculates market share by the dollar amount of mattress sales.
Tempur-Pedic came in fourth, at 13.9 percent, and Select Comfort, maker of the Sleep-Number bed, was at 4.7 percent. A slew of small companies constitute the remainder, making up almost 30 percent of total demand.
The merging companies contend that their market share is lower, as measured by unit sales of beds, putting Tempur-Pedic's at closer to 3 percent and Sealy at about 13 percent.
Serta and Simmons have been owned since 2009 by private-equity firm Ares Management LLC and a unit of the Ontario Teacher's Pension Plan, although they still operate independently and compete aggressively, said an industry expert who asked not to be named to protect business relationships.
The combination of Tempur-Pedic and Sealy would create a powerhouse with about 31.7 percent of the market. Serta and Simmons, if viewed as one entity, have 33.8 percent.
Approval of the deal would mean that two companies would control 65 percent of the U.S. mattress market - a big change from just five years ago.
Market consolidation was triggered by the great recession and the associated decline in new household formation, along with the flood of consumer electronics that compete with more utilitarian items for Americans' disposable income.
In 2007, mattress sales rose 1.4 percent to an all-time high of almost $6.9 billion, according to the International Sleep Products Association. Sales dropped sharply in 2008 and 2009, down 9.1 percent and 9.4 percent, respectively. Sales were $6.3 billion in 2011, the ISPA said.
Tempur-Pedic sought out Sealy as it fights to keep the burgeoning market for expensive foam mattresses and accessories. The deal would also allow the company to gain a toehold in the bigger inner-spring segment.
Tempur-Pedic's beds were created using technology that NASA developed in the 1970s to support astronauts during lift-off, which was later adapted by scientists in Denmark and Sweden for use in mattresses.
Kentucky businessman and horse-racing enthusiast Bob Trussell traveled to Europe in 1992, and he soon decided to form Tempur-Pedic in his home state. The company, headquartered in Lexington, now has plants in Virginia and New Mexico.
A company with a much longer history, Sealy began in 1881 in its namesake Texas town, west of Houston, making cotton-stuffed mattresses. The company, which claims to have been the first to sell a king-sized bed, was the top U.S. mattress maker for three decades, according to Sealy's website.
Sealy's products includes the high-end Stearns & Foster mattress line, but it has recently shown an interest in moving into the slice of the market that Tempur-Pedic dominates.
Sealy created a "specialty bedding" unit in September 2011 and brought out a specialty gel mattress, the Optimum, in January 2012, according to its website.
In 2012 Sealy bought 45 percent of tiny Comfort Revolution International LLC, which makes foam and gel mattresses. Sealy said in a government filing that the buy would help it "gain better access to the 'top of bed' industry which we believe provides significant opportunity."
Tempur-Pedic's dominance of the market for expensive memory foam mattresses and Sealy's earlier decision to move into that category could prompt concern at the FTC, said an antitrust expert knowledgeable about the market. The expert asked not to be named to protect business relationships.
The companies have argued to the FTC that the mattress market is still competitive and wide open, with some major retailers recently entering the market for the first time, according to a source close to the deal.
Bert Foer, president of the American Antitrust Institute, said the FTC would likely look at the mattress market as a whole rather than splice it into narrower segments.
"This could be a case on the cusp, rather than a no-brainer in either direction," said Foer, who argued that internal FTC politics could also play a role.
With the departure of Jon Leibowitz as chairman - Commissioner Edith Ramirez has replaced him, leaving one spot vacant. There are two Democrats -- Ramirez and Julie Brill -- and two Republicans -- Joshua Wright and Ohlhausen -- on the commission. In the case of a tied vote, no action is taken.
Winning confirmation for a new commissioner could take months, and few candidates have emerged so far.
This will be a test for the Republican commissioners, said Foer. "If there is enough evidence to satisfy Democratic appointees Brill and Ramirez, it could be an early test of how far Republican appointees Wright and Ohlhausen will go in merger controls."
(Reporting By Diane Bartz; editing by Ros Krasny and Leslie Adler)