This is so thick it’s hard to believe. It’s far beyond just a Brick & Mortar Meltdown.

“I recently sold a small strip center with my last Mattress Firm,” a relieved real estate developer told me earlier this year. “It traded at a 7.1% cap rate, which is just astonishing to me. During due diligence, the buyer’s lawyers focused on every minute risk and mentioned nothing about their parent company once. So crazy.”

Mattress Firm’s parent company is Steinhoff, now a familiar name in the Enron lexicon.

“Mattress Firm’s strategy is to have multiple stores on the same intersection in every town,” this developer had told me last fall. “This was accomplished by design and not just mergers. As a developer, I was literally asked to find sites across the street from existing stores in almost every town. Mattress Firm was able to get these sites because they would overpay market rent by up to $10 per square foot in every market that I was focused in, but it is the same all over,” he said.

To get out of these leases, and for other reasons, Mattress Firm, the largest mattress retailer in the US, is now considering a bankruptcy filing, people familiar with the matter told Reuters.

Restructuring in bankruptcy court would allow Mattress Firm to shut down unprofitable and excess stores and get out from under their over-priced leases.

Mattress Firm, which was founded in 1986, is a classic example of a private-equity pump-and-dump that has turned into an alleged real estate scam by insiders. Here is the turn of events:

The PE Firm Era:

2002: Private-equity firm Sun Capital acquires Mattress Firm, one of the largest Sealy dealers in the US, with over 300 stores, including 175 company-owned stores and over 125 franchised stores.

2007: Sun Capital sells Mattress Firm, which had grown to about 335 stores, to PE-firm J.W. Childs.

November 2011: J.W. Childs engineers the IPO of Mattress Firm, which had grown to 695 company-owned stores and 117 franchised stores.

Short life as a public company:

February 2016: Mattress Firm completes the acquisition of Mattress Holdings LLC, owner of Sleepy’s and related entities, for $780 million. At the time, Sleepy’s had 1,050 stores.

February 2016: After the Sleepy’s acquisition closes, Berkshire Partners (a PE firm not to be confused with Buffett’s outfit) acquired a 10% stake in Mattress Firm, which by then operated over 3,500 stores, including the Sleepy’s stores.

Steinhoff buys Mattress Firm at an inexplicable price:

September 2016: Steinhoff International Holdings, a global retail empire headquartered in South Africa, acquires Mattress Firm for $2.4 billion, a stunning and to this day inexplicable 115% premium.

The alleged real estate scam blows into the open:

2017: Mattress Firm fires its real estate and construction team, including in-house real estate executives Bruce Levy and Ryan Vinson, and its brokers at Colliers International.

November 2017: Mattress Firm sues Levy, Vinson, Colliers International’s Atlanta office, Colliers International Senior VP Alexander Deitch, and some developers, alleging they steered stores to locations with leases well above market rates. During their time, these people were responsible for about 1,500 new stores plus many lease renewals. The suit alleges that many of the properties were owned by an “inner circle” of developers that handed out kickbacks and gifts to Colliers, Levy, and Vinson in return for favorable Mattress Firm deals. The scheme may have started as early as 2009.

Just as parent company Steinhoff collapses:

December 2017: Steinhoff collapses after it admits to “accounting irregularities.” By now, this has become a wide-ranging, complex, and messy affair with off-balance-sheet entities, a €1.6 billion margin loan to Steinhoff’s former chairman, and other entanglements. Steinhoff begins an arduous restructuring process of its $21 billion in debts. Shareholders got crushed; bondholders, including the ECB, got whacked; Citi, BofA, HSBC, Goldman, and BNP are on the hook.

January 2018: Mattress Firm CEO Ken Murphy was shoved out due to “the need for a singular voice of leadership,” as the board said, and replaced by Steve Stagner, who’d served as CEO from 2010 to 2016.

Mattress Firm gets countersued:

January 2018: Fired Vinson claimed in a court filing that Mattress Firm has no right to sue him because it has “unclean hands,” and that Mattress Firm’s “alleged injuries are caused in whole by plaintiff’s own acts and not the acts of Mr. Vinson.”

February 2018: Fired Levy filed a motion to compel Mattress Firm to reveal documents showing any real estate investments current CEO Stagner and former CEO Murphy participated in with developers of Mattress Firm stores between 2010 and 2016. He is also trying to compel the company to reveal any gifts, trips, meals, tickets, and other outside compensation Stagner, Murphy, and other executives had received.

March 2018: Former Colliers VP Deitch countersues Mattress Firm, claiming that it “essentially weaponized the real estate department and its brokers to advance the larger agenda of removing all competition it could,” the suit claims. “Mattress Firm’s aggressive roll-up was reckless, resulting in massive clustering of stores, assumption of bad locations which needed to be propped up, and astounding redundancies in certain markets.”

The developer who’d sold his last Mattress Store location just in time earlier this year told me last fall: “Each buyer was an unsophisticated retiree looking for safe yield!”

Because you can’t lose money in real estate.

“The amount of Mattress Firm’s that flooded the market is staggering,” he said at the time. “There will be many vacancies but at least there is one saving grace: they are usually good real estate but will have to be re-leased up at market rents. So much for safe yield.”

Wells Fargo made a Friday-afternoon-in-August disclosure so that no one would notice. Read… It Just Doesn’t Let Up with Wells Fargo

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