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Sealy investor blasts KKR, seeks board seat

By Greg Roumeliotis and Mihir Dalal

(Reuters) - Sealy Corp's second-largest shareholder launched a scathing attack against private equity firm KKR & Co LP , accusing it of wiping out 90 percent of the mattress maker's value while saddling it with debt and milking it with fees.

In a letter to Sealy, H Partners Management LLC, which has a 14.5 percent stake in the company, takes aim at KKR not just over its management decisions but also over the conduct of Capstone, KKR's branded team of consultants who claim on their website to "deliver results, not recommendations."

Capstone has so far been eager to advertise its work on Sealy, featuring words of praise on KKR's website from Sealy Chief Executive Lawrence J. Rogers, who is set to retire this year once a successor for the troubled company is found.

But in its letter to Sealy, made public on Monday, H Partners blamed KKR, which owns 46.2 percent of Sealy, for the poor performance of its stock, pointing out that, since an initial public offering in 2006, Sealy shareholders have collectively seen equity value reduced by $1.3 billion, or about 90 percent.

"In our view, this value destruction is due to the poor judgment, interference and conflicts of interest of one shareholder: Kohlberg Kravis Roberts & Co," Usman Nabi and Arik Ruchim of H Partners wrote in the latter.

H Partners asks for a seat on Sealy's board and said it is willing to waive any board fees. It also asks for a revamp of the board because at least seven out of its nine members work for KKR or are strongly affiliated.

Sealy, which was started by cotton gin builder Daniel Haynes in the late 19th century, was taken public by KKR two years after its acquisition from another private equity firm, Bain Capital LLC, for $1.5 billion in 2004.

The company, which has debt of $790.3 million, has seen earnings drop by half between 2006 and 2011, hit by increased competition from the likes of Select Comfort Corp and Tempur-Pedic International Inc , which have been more aggressive in meeting soaring demand for specialty mattresses.

Sealy currently trades at 6.9 times enterprise value to 12-month estimated earnings before interest, taxes, depreciation and amortization -- a measure of how investors value it -- compared with 11.3 times for Select Comfort and 12.3 for Tempur-Pedic, according to Thomson Reuters Starmine.

CALL TO RESIGN

H Partners accuses KKR of taking a short-term investment approach to Sealy and not committing the necessary resources for the company to market innovative specialty products, resulting in the mattress maker forfeiting its market-leading position.

A lot of H Partners' criticism is focused on Dean Nelson, KKR's consultant-in-chief and head of Capstone. The investment firm calls for his resignation as Sealy director, arguing that, as a provider of consulting services, he faces a conflict of interest.

While Sealy paid KKR $11 million in 2006 to terminate a consulting services agreement, Sealy's board authorized the resumption of payments for consulting to KKR in 2008 and has paid it $20.9 million since the IPO, H Partners said.

"In our experience, a service provider who consistently fails to deliver on key objectives is terminated. Therefore, we ask ourselves how and why Mr. Nelson and KKR Capstone are still involved in any capacity at Sealy," Nabi and Ruchim wrote.

H Partners also said Nelson, as chairman of Sealy's nominating and corporate governance committee between 2006 and 2010, exerted "excessive operating influence" and oversaw the appointment of board directors who were not truly independent.

H Partners also asked to place a representative on Sealy's nominating and corporate governance and CEO search committees. It said it expressed its concerns to Sealy's board over the past several months, to no avail.

Nelson referred inquiries to a KKR spokeswoman, who declined to comment. A Sealy spokeswoman said: "We have heard and considered H Partners' concerns over the past few months, and will consider H Partners' latest comments with appropriate care."

H Partners built its stake in Sealy over the last year and has a track record of distressed investment. Founded in 2005 by Rehan Jaffer, the hedge fund was one of the investors in theme park operator Six Flags Entertainment Corp during its restructuring in 2010.

Six Flags shares have more than doubled in value since the company emerged from bankruptcy. Nabi, one of the two authors of the letter to Sealy, serves on Six Flags' board of directors and has worked at another buyout firm, Carlyle Group LP.

Sealy shares were up 2.3 percent at $1.80 on Monday afternoon on the New York Stock Exchange. Earlier, they reached as high as $1.91.

(Reporting by Greg Roumeliotis in New York and Mihir Dalal in Bangalore; Editing by Gerald E. McCormick)

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