Sleepy's agrees to pay $2.1 million for 1800mattress.com

Proposed deal would unite two New York-based bedding chains

Larry Thomas -- Furniture Today, March 25, 2009

NEW YORK — Retailer 1800mattress.com has asked a U.S. Bankruptcy Court judge to convert its bankruptcy case into a Chapter 11 reorganization to pave the way for a sale to rival Sleepy's for $2.1 million.

Last week, three of 1800mattress.com's creditors filed a petition to force the company into Chapter 7 bankruptcy liquidation. But in documents filed with the court this Monday and Tuesday, the retailer said it has reached tentative agreement to sell the company to Bethpage, N.Y.-based Sleepy's as part of a Chapter 11 reorganization.

Judge Dennis Milton has scheduled a hearing for Thursday morning on the retailer's request.

According to court documents, Sleepy's would pay $2.1 million for substantially all of 1800mattress.com's assets. In addition, Sleepy's, which provided its rival with a $150,000 bridge loan last week, would provide $550,000 in debtor-in-possession financing.

1800mattress.com also is asking the court's permission to reject several unexpired leases prior to the sale - a move that indicates Sleepy's is planning to close some or all of the 34 bricks-and-mortar stores operated by 1800mattress.com.

Under the proposed terms of the sale, Sleepy's would be designated as the stalking horse bidder in the Chapter 11 case. Competing bids would have to be submitted by April 13 and an auction, if necessary, would be conducted April 16.

If 1800mattress.com were to be sold to another party, Sleepy's would be entitled to a breakup fee of $75,000 and reimbursement of certain expenses up to $50,000, according to the proposal.

Shortly before the Chapter 7 petition was filed, 1800mattress.com announced it had signed a letter of intent to sell the company to an investor group let by mattress industry veteran Ken Mazda. However, the retailer said in court documents that those discussions had been terminated.

"We have determined that Sleepy's offered us the best opportunity to recapitalize and move our business plan forward," said Napoleon Barragan, founder and CEO of 1800mattress.com. "There are tremendous business synergies we can leverage by affiliating with Sleepy's."

Adam Blank, chief operating officer of Sleepy's, described 1800mattress.com as a "valuable brand poised for future growth."

"We look forward to working with 1800mattress.com vendors and employees to assure that customers receive the same quality service and merchandise that have made 1800mattress.com so successful," Blank said.

According to court documents, Sealy, one of two mattress producers filing the original Chapter 7 petition, is 1800mattress.com's largest unsecured creditor. The company is owed $1.19 million. Comfort Solutions licensee Blue Bell Mattress, also known as King Koil Northeast, is the other producer seeking Chapter 7 for the retailer and is owed $504,858.

1800mattress.com is best known for selling mattresses over the telephone, but in recent years it has opened bricks-and-mortar stores and aggressively pursued Internet sales through Web sites such as Amazon.com and Walmart.com.

Documents filed with in bankruptcy court say the retailer currently has 34 bricks-and-mortar stores and has closed 15 locations in recent months.

Sleepy's, a longtime rival of 1800mattress.com in the New York market, has nearly 700 stores in 11 states.

Both retailers have been fixtures on Furniture Today's Top 100 list for years. The most recent rankings, published in May 2008, put Sleepy's at No. 14 with 2007 sales of $514 million, up 13.2% from 2006.

1800mattress.com was ranked No. 67 with 2007 sales of $104 million, down 32% from the previous year.

Sales for 2008 were not available for Sleepy's; a spokesman for 1800mattress.com said that company's sales were below $100 million last year.

The bankruptcy proceedings do not involve a 1800mattress.com franchise group based in Massachusetts that serves customers in New England, Philadelphia, central and southern New Jersey and Florida. The franchise group is a separate company and has separate agreements with vendors.

Industry companies listed among the 30 largest unsecured creditors of 1800mattress.com, also known as Dial-A-Mattress, include:

Sealy Inc., owed $1.19 million
Serta Mattress Co., $913,003
King Koil Northeast, $504,858
Simmons Mfg., $475,183
Tempur-Pedic, $315,614
Rex Bedding Sleep Products, $190,338
L&P Financial Services, $164,170
S&S Mattress Distribution, $95,798
Knickerbocker Bed, $78,572
Southern Textiles, $72,491
Magniflex USA, $59,638
Serta Mattress Co.-Moreno Valley, $58,405
Steinreich Communications, $53,620

Rex Bedding also is the retailer's largest secured creditor, having loaned the company $700,000 in 2008 and an additional $192,090 earlier this month.