FTC Fights Tempur Sealy-Mattress Firm Deal as Khan Era Wraps (1)

Tempur Sealy International Inc.’s planned $4 billion purchase of Mattress Firm would give it the power and incentives to box out competitors and harness the specialty retailer for itself, the Federal Trade Commission argued Tuesday as it kicked off a trial over the deal.

Company records from Tempur Sealy, the global mattress manufacturer, show that executives saw Mattress Firm as a “kingmaker” because of its massive national retail footprint, as well as a vehicle to undercut their rivals, according to the FTC.

Such statements are “the tip of the iceberg,” FTC counsel Allyson Maltas said. “We’re not bringing this case because a rival complained,” she added later. “We’re here to protect competition.”

Tuesday’s hearing in the US District Court for the Southern District of Texas began one of the final trial tests for an FTC chaired by progressive Lina Khan. Khan, who pushed to bring more merger cases to court in lieu of settlements, is expected to leave in January as President-elect Donald Trump returns to office.

A bipartisan 5-0 FTC commission in July voted to block the Tempur Sealy-Mattress Firm tie-up, which would combine the world’s largest mattress supplier with the nation’s biggest mattress specialty retailer.

The FTC has argued that the deal will stifle competition and inflate prices in the market for “premium mattresses,” which it considers to be mattresses in the ballpark of $2,000. It is moving for an order pausing the merger to allow for its in-house case to proceed.

Tempur Sealy and Mattress Firm have said that the deal will reduce costs and spur innovation. Mattress Firm has no plans to cease selling products from various vendors, they argued Tuesday.

Judge Charles Eskridge, a Donald Trump appointee, is overseeing the evidentiary hearings, which are scheduled to wrap in December.

Effect on Rivals

The business of Mattress Firm is central to the dispute. The Houston-based retailer has roughly 2,300 brick-and-mortar retail locations across the US that offer an assortment of mattress brands, including Tempur Sealy rivals Purple and Serta Simmons Bedding.

Maltas argued in her opening that basic economics, as well as Tempur Sealy’s track record after other mergers, show the deal is likely to disfavor rivals once consummated.

The FTC called as its first witness Purple CEO Robert DeMartini, who said his fear from the merger is that a major competitor will become a big customer.

Counsel for Tempur Sealy and Mattress Firm argued a lot of the FTC’s case rested on speculation.

The “grand plan” in which Tempur Sealy uses the deal to push out competitors at Mattress Firm stores has no basis in reality, argued Tempur Sealy counsel Ryan Shores, at Cleary Gottlieb Steen & Hamilton LLP.

He also noted that Tempur Sealy rivals represent less than 10% of Mattress Firm’s premium mattress sales, meaning that Tempur Sealy disfavoring them would have little market effect.

Siding with the FTC’s theories would be “unprecedented” and “threaten numerous garden variety vertical mergers,” Shores said, referencing deals between entities with customer-supplier relationships.

Vertical Mergers

Vertical merger challenges are rare compared to deals involving head-to-head competitors. But the Khan-led FTC has pursued more cases involving vertical deals in recent years.

A big win came last December when the US Court of Appeals for the Fifth Circuit held that biotech firm Illumina Inc.’s $7 billion acquisition of cancer detection startup Grail Inc. violated antitrust laws. The FTC’s Maltas cited that case Tuesday, noting the opinion showcased there are “myriad ways” in which a vertical merger can hurt competition.

Tempur Sealy, on the other hand, argued that Illumina-Grail represented an “extreme situation.”

That deal would have made it likely that Illumina, with its vast market share in the genome sequencing space, would “foreclose” cancer testing rivals who need sequencing, Shores argued. Tempur Sealy’s doesn’t have the equivalent market share, Shores said.

Antitrust enforcers have in the past struggled to block vertical deals in court. The FTC in 2023 lost its initial bid to block Microsoft Corp.'s purchase of video game company Activision Blizzard Inc. That case is pending on appeal.

As part of its effort to gain approval, Tempur Sealy and Mattress Firm in September said they planned to sell more than 100 stores.

Mattress Firm is represented by Simpson Thacher & Bartlett LLP.

The case is FTC v. Tempur Sealy Int’l Inc., S.D. Tex., 4:24-cv-02508, 11/12/24