Casper Sleep: Fall Asleep And Wake Up To $6.90 Per Share

Summary

• Casper Sleep Inc. is being acquired for $6.90/sh in cash.
• With shares trading ~$6.68, there remains a nice opportunity to net a ~3.4% return in a matter of weeks.
• There is a 95% chance that the pending transaction will be successful.

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Casper Sleep Inc. (NYSE: NYSE:CSPR, "Casper") is being acquired for $6.90/sh in cash. The acquisition is essentially done with only the shareholder vote remaining. But with shares trading ~$6.68, there remains a nice opportunity to net a ~3.4% return in a matter of weeks.

The Company

Casper is a designer and seller of mattresses, pillows, sheets, and other sleep-centric products. The company started out as a strictly online retailer delivering products in a box direct-to-consumer but has since expanded by opening 67 retail stores across North America (as of December 31, 2020) and establishing partnerships with over 20 retailers including Amazon, Costco, and Target.

Casper has struggled as a public company since its IPO in February 2020. It has missed EPS estimates 5 out of 8 times and remains unprofitable by a wide margin:

Source: Casper Earnings History, Seeking Alpha

Its stock has not fared well either. Casper initially priced at $12/sh but lost over 70% of its value up until the acquisition was announced last November:

Data by YCharts

Despite underperforming in the public markets, Casper is growing at a fast clip. Revenues grew double digits YoY in the last 4 quarters with revenues reaching a record $157m in Q3'21:

Source: Casper Earnings History, Seeking Alpha

Moreover, the Street is expecting FY'21 sales of $604m, up 22% from FY'20, and FY'22 sales of $690m.

Casper's topline strength and floundering public market performance make it a prime target for an experienced management team to step in and take the company private. Ergo, the transaction.

The Transaction

In its November 15, 2021 press release, Casper announced it was being acquired by private equity firm Durational Capital Management for $6.90/sh in cash. The transaction came after Casper's board spent several months exploring alternatives for creating shareholder value for the firm. Despite being a relative newcomer to the private equity space, founded in 2017, Durational has an experienced team with a focus on consumer businesses and an established track record of deal-making in the consumer sector.

Financing

The acquisition is expected to cost Durational $415m for 100% control of Casper. The deal is not contingent on financing as Durational has already obtained a $372m equity commitment as well as an additional $100m debt commitment from KKR Credit Advisors, a subsidiary of KKR and Callodine Commercial Finance.

Shareholder vote

The deal is, however, contingent upon, inter alia, approval by a majority of Casper's shareholders. The vote is set for January 19, 2022. With that said, in addition to the Merger Agreement, Casper's executives and board members entered into a voting agreement to vote their 30.58% of the company's shares in favor of the transaction. Therefore, the parties only need 19.43% of Casper's remaining shares to vote yes in order to consummate the transaction. Given that there are few large holders of the stock outside the shares held by those already committed to vote in favor of the transaction, and none with more than 5% ownership, it is unlikely the vote will derail this transaction.

Regulatory approval

The transaction is also contingent on receiving antitrust approval under the HSR. The requisite filings were made by the parties on November 26, 2021, and the mandatory waiting period has since expired. Therefore, the transaction is clear to move forward.

Pending litigation

Another potential obstacle is litigation that results in a court prohibiting consummation. Currently, the acquisition is being contested in federal court in the Southern District of New York. There are two complaints:

• Keel v. Casper Sleep Inc. et al., Case No. 1:21-cv-10546; and
• Robles v. Casper Sleep Inc. et al., Case No. 1:21-cv-10547

Each complaint requests injunctive relief as well as other damages. These are run-of-the-mill lawsuits and will very likely result in settlement. Therefore, it is doubtful the litigation will result in a failed transaction.

Timeline

The Proxy Statement states that the parties believe the transaction will be completed in 2022. With that said, aside from settling the pending suits, the only obstacle is the shareholder vote, which is set for January 19th. Therefore, it is expected the acquisition will close before the end of January.

Opportunity

If the pending transaction is consummated, holders of Casper's shares will receive $6.90/sh in cash. Based on its current market price of ~$6.68, Casper shareholders can lock in an ~3.4% return. Given that the transaction is expected to close in <1 month, the opportunity is very enticing.

Risk

As is the case with any pending transaction, there is always a risk that the deal will fail. In this case, the probability is small that the deal will fall through. Nevertheless, assuming the deal does break, the stock will likely trade much lower than today's price. A day before the deal announcement, Casper's stock hit an intraday low of $3.18/sh; this is only slightly above the stock's all-time low of $3.15/sh hit at the height of the pandemic. The intraday low represents a 52% decrease from today's price. Based on the merger proxy there was very little interest from other potential strategic and financial acquirers for Casper. Moreover, as previously mentioned, the company has poor fundamentals. Therefore, if the deal does collapse, the price drop will be precipitous.

With that said, in light of the foregoing analysis, there is a 95% chance this deal closes under current terms and likely by month's end.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CSPR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.