Select Comfort to sell minority stake to Sterling Partners for $10M

Unlike previous deal, agreement doesn't require shareholder OK

Larry Thomas -- Furniture Today, October 5, 2009

MINNEAPOLIS — Bedding producer and retailer Select Comfort said it has reached a new agreement with Sterling Partners that would give the private equity firm an 8.9% ownership stake.

Under terms of the deal, Sterling would invest $10 million by June 2010 in exchange for 2.5 million shares at $4 per share, plus warrants to purchase an additional 2 million shares at 1 cent per share. After exercise of the warrants, Sterling would have an 8.9% stake.

Earlier this year, Sterling had agreed to buy 50 million Select Comfort shares for $35 million, or 70 cents per share. That would have given the firm 52.5% ownership and a majority of the seats on the company's board of directors. However, that deal was narrowly rejected by shareholders.

"This agreement positions us to pursue additional capital, which combined with the Sterling investment, with strengthen our financial position and increase our financial flexibility," said Bill McLaughlin, CEO.

The new agreement will not require shareholder approval.

In addition to exploring additional financing alternatives, the company is continuing to negotiate with its lenders to secure a permanent financing agreement, McLaughlin said.

The company has been struggling financially for more than a year, and its auditors placed a "going concern" qualification on its 2008 financial statements after same-store sales at company-owned retail stores plunged 25%.

In recent months, Select Comfort has been out of compliance with some of its loan covenants, but has operated under a series of default waivers. The most recent waiver expires Oct. 13.

As part of the new deal between the company and Sterling, both parties agreed to terminate the old agreement and release each other from claims resulting from the original deal, including a termination fee and lawsuits the parties had filed.

Select Comfort said its third-quarter results will include one time charges of $3 million to $5 million stemming from the original agreement.