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As owners profited, fabled firm declined

Noble Rogers at the Simmons plant in Mableton, Ga., where he worked for 22 years before it closed in July. Simmons says it will file for bankruptcy protection. Noble Rogers at the Simmons plant in Mableton, Ga., where he worked for 22 years before it closed in July. Simmons says it will file for bankruptcy protection. (David Walter Banks/The New York Times)
By Julie Creswell
New York Times / October 5, 2009

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NEW YORK - For most of the 133 years since its founding in Wisconsin, Simmons Bedding Co. enjoyed an illustrious history. Presidents have slumbered on its mattresses aboard Air Force One. Dignitaries have slept on them in the Lincoln Bedroom. Its advertisements have featured Henry Ford and H.G. Wells. Eleanor Roosevelt extolled the virtues of the Simmons Beautyrest mattress, and the brand was immortalized on Broadway in Cole Porter’s song “Anything Goes.’’

Its recent history has been notable, too, but for a different reason.

Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company - the seventh time it has been sold in a little more than two decades - all after being owned for short periods by a parade of private equity firms, which try to buy undervalued companies, mostly with borrowed money.

For many of the company’s investors, the sale will be a disaster. Bbondholders stand to lose more than $575 million. The company’s downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons. He is one of 1,000 employees - more than one-quarter of the workforce - laid off last year.

But Thomas H. Lee Partners, of Boston, has escaped unscathed. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping to run it. Last year, the firm even gave itself a small raise.

Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years.

How so many people could make so much money on a company that has been driven into bankruptcy is a tale of these financial times. Every step along the way, the buyers put Simmons deeper into debt. The financiers borrowed more and more money to pay ever higher prices for the company, enabling each previous owner to cash out profitably.

But the load weighed down an otherwise healthy company. Today, Simmons owes $1.3 billion, compared with just $164 million in 1991, when it began to become a Wall Street version of “Flip This House.’’

In many ways, what private equity firms did at Simmons mimicked the subprime mortgage boom. Fueled by easy money, buyout kings like THL upended the old order on Wall Street.

These private investors were able to buy companies like Simmons with borrowed money and put down relatively little of their own cash. Twice after buying Simmons, THL borrowed more. It used $375 million of that money to pay itself a dividend, recouping all of the cash it put down, and then some.

The result: THL was guaranteed a profit, regardless of how Simmons performed.

“From my experience, none of the private equity firms were building a brand for the future,’’ said Robert Hellyer, Simmons’ former president, who worked for several of the private equity.

Executives at THL counter that Simmons was the victim of hard economic times, not mismanagement or too much debt. They point to Simmons’ 40 percent growth in sales and 26 percent climb in operating income from 2003 through 2007, as well as 13 consecutive quarters of market share gains against competitors through March 2009.

Simmons’ woes, said Scott A. Schoen, a co-president of the firm who sat on Simmons board, are entirely caused by the “unprecedented and unforeseeable’’ downturn that has shaken the entire bedding industry.