Owner selection for Select Comfort

When Select Comfort Corp. sent up a distress flare in March -- seeking a strategic direction and a cash infusion -- its stock was trading at 29 cents a share.

The Plymouth-based bed manufacturer, with stock in the $17 range two years ago, had been hobbled by the recession. Fourth-quarter sales plunged 31 percent.

The company still was suffering from the throes of the recession in May when Sterling Partners, a private equity firm, offered to buy a 52.5 percent majority interest for 70 cents per share or $35 million.

On Thursday, Select Comfort shareholders will decide whether to accept the Sterling deal or scuttle it. They've had three months to mull the Sterling-Select Comfort agreement, a period in which the company has made progress on its financial turnaround plan -- and improved its stock price. It closed Tuesday at $2.57 a share.

In the second quarter, Select Comfort beat analysts' earnings expectations and closed 21 stores. Analysts had projected a loss of 12 cents per share, when special items were excluded, but the company lost only a penny a share.

Select Comfort's board of directors and two influential proxy advisory firms, RiskMetrics Group and Glass, Lewis & Co., have recommended approving the Sterling deal.

But Galt Investment Partners, which holds 2 million shares, has voted no and its managing member urged the Select Comfort board in a Friday letter to torpedo the deal.

Lick argued that Sterling should not be permitted to buy shares at a substantial discount and that "such a windfall profit" would be unfair to the other shareholders. He argued that all shareholders should be given the opportunity to buy shares at this time. The board should move to conduct a "rights offering" open to shareholders, which Lick said would satisfy "any capital needs."

Select Comfort and Sterling executives declined Tuesday to comment on the issues Lick raised.

But when the deal was disclosed in late May, Chairman Ervin Shames said it met the board's goals of "improving the company's financial flexibility, securing a longer-term credit agreement with our bank syndicate, and finding an investment partner who recognizes the long-term potential of Select Comfort."

In conjunction with the Sterling deal, Select Comfort's lenders have agreed to negotiate amendments to a credit agreement that would give Select Comfort access to $70 million and extend the maturity date until the end of 2012. In a recent regulatory filing, the company said there was "uncertainty" about amending the agreement if the Sterling deal is rejected.

Select Comfort spokeswoman Gabby Nelson said that if the deal is approved Thursday morning, the company expects to close the transaction by Thursday afternoon.

Six board members, including McLaughlin and Shames, already have tendered conditional resignations and will leave if the Sterling proposal is approved. Sterling would cut the board from 10 to nine members and already has designated five new appointees, including Sterling co-founders Chris Hoehn-Saric and Eric Becker.

Sterling leaders declined to be interviewed for this story, but in a June presentation, their vision for the company was outlined. It includes revitalizing Select Comfort's brand and marketing approach, emphasizing a "sales-focused culture" and investing in innovation and product development.

Since the recession took hold, Select Comfort has modified its product line to focus on price-conscious consumers and it has been emphasizing products that sell for $1,500 or less.

In a recent report, Raymond James analyst Budd Bugatch wrote that Select Comfort has seen the benefits of "cost reductions, product re-designs, productivity improvements and lower commodity costs."

He wrote that the Sterling transaction would remove a "near-term threat of a more drastic restructuring" at Select Comfort.

Select Comfort shares hit their all-time low of 19 cents last December. The company, founded in 1987, had sales of $260.3 million for the first half of this year, down nearly 19 percent from a year earlier.

It has closed more than 50 stores over the past year, although it recently reported some positive news: Same-store sales in July were up 1 percent over the prior year.

While Select Comfort shareholders were mailed the Sterling proposal a month ago, a new wrinkle cropped up last week.

It was disclosed in a regulatory filing that Clinton Group, Inc., a New York investment group, would fund a portion of Sterling's purchase price of up to $5 million. Clinton was among Select Comfort's largest shareholders, with a more than 7 percent stake, as of mid-August.

In a Friday filing, Select Comfort said it was not informed of this development until just prior to the consummation of the Sterling-Clinton agreement. Select Comfort said that "it is concerned that the agreement appears to advantage one, or a limited number, of the company's shareholders over others."