Equity firm invests $35 million in Plymouth-based Select Comfort

Select Comfort Corp. has been thrown a financial lifeline by a private equity firm that will become majority owner of the Plymouth-based bedmaker.

Sterling Partners, with offices in Baltimore and Chicago, plans to invest $35 million in Select Comfort for a 52.5 percent stake in the company. Sterling also would designate five members of the Select Comfort board, which will be reduced to nine people.

Select Comfort CEO Bill McLaughlin characterized Sterling as a "partner who not only offers deep business knowledge and resources, but also shares our commitment to realizing the company's long-term potential."

Select Comfort's future has been a topic of debate in recent months, as sales plummeted and its cash balance dipped to $13.1 million over the winter.

For months, Select Comfort has been exploring "strategic and financing alternatives." Even Sterling's offer of 70 cents per share shows how far the company has fallen. Shares traded above $20 until late 2006.

Investors reacted favorably Tuesday to the company's announcement that it has entered into a stock purchase agreement with Sterling Partners. Select Comfort's stock rose 20 cents, or 25 percent, on Tuesday and it closed at $1 per share.

Budd Bugatch, a Raymond James analyst, on Tuesday upgraded his rating on Select Comfort to "market perform" after Select Comfort's deal with Sterling was disclosed.

Select Comfort had a particularly disappointing fourth quarter, in which its sales plunged 31 percent and it lost $57.4 million for the period ending Jan. 3.

But the company showed improvement in the first quarter that ended April 4, with its loss narrowing to $2.7 million.

The bed manufacturer closed 30 stores during the first quarter and planned to shutter 25 more. It also relaunched its product line, with greater emphasis on selling products below $1,500 to consumers who have become more price-oriented.

In a regulatory filing in March, Select Comfort's auditor, KPMG, said the company's financial statements raised "substantial doubt as to the company's ability to continue as a going concern."

Erv Shames, Select Comfort's board chairman, said in a written statement Tuesday that the Sterling Partners investment will improve the company's financial flexibility and help it secure a longer-term credit agreement with its banks.

Chris Hoehn-Saric, Sterling's co-founder and senior managing director, said Select Comfort has made decisive moves over the past 12 months that have "helped the company weather the current environment, while also positioning it for future success." He referred to Sterling as "long-term investors and true partners to the company" and pledged to "return the company to profitability and growth," according to a news release.

Select Comfort expects the proposed agreement to be voted on by shareholders by late July or early August.