South African furniture retailer Steinoff Intl Holdings (SNH SJ) agreed to acquire Mattress Firm Holding Corp (MFRM US) for $64/share, a 115% premium, or $2.4 billion.
MFRM short interest peaked in July 2015 at $332 million when the stock hit $62.77. By yearend its stock price dropped 29% and short interest was down to $264 million. Short interest remained steady from January to July 2016, ranging between $200-$300 million. As MFRM’s stock price dropped to a YTD low of $29.14 after they issued a profit warning for 2016 due to a $139 million rebranding charge. Some short sellers covered their positions to realize their profits and as of Friday, August 5th there were 5.5 million shares short, down $78 million from the end of the 2nd quarter.
If the remaining short sellers had their positions open from the beginning of the year they were sitting on $82 million of unrealized profits. Steinoff’s $64 offer rocketed Mattress Firm’s stock price up over 114% and generated a one day unrealized loss of $188 million. Year-long Mattress Firm short sellers went from a $14.89/share profit to a $19.09/loss or $106 million in unrealized losses.
The cost to borrow MFRM stock increased today as well. Stock borrow costs were already expensive at a 16% fee, and today MFRM stock borrows are trading between 15% and 20% fee. We are expecting a large amount of buying to cover in the next several days with a large portion of the existing 5.5 million short shares closing out their positions. Borrow rates should drop significantly as stock is returned to lenders by the end of the week.
For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net
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