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Cerberus to Sell Gunmaker Freedom After School Massacre

By Devin Banerjee, David Carey and Cristina Alesci
December 18, 2012 7:18 PM EST 47 Comments
U.S. Senator Dianne Feinstein, a California Democrat, said she’ll introduce in the new Congress convening in January legislation to reinstate a federal ban on assault weapons that expired in 2004.
Photographer: Jay Westcott/Bloomberg
U.S. Senator Dianne Feinstein, a California Democrat, said she’ll introduce in the new Congress convening in January legislation to reinstate a federal ban on assault weapons that expired in 2004.

Cerberus Capital Management LP, the New York-based investment firm that owns the largest U.S. gunmaker, will put the company up for sale, acting four days after one of its rifles was used in the Connecticut school shootings that left 26 people dead, including 20 six- and seven- year-olds.

Cerberus said it will seek to sell Freedom Group Inc. just hours after California Treasurer Bill Lockyer said he’ll propose that the state’s public pension funds, the two largest in the U.S., divest investments in firearm manufacturers that make guns prohibited under state law. The firm’s announcement followed a day in which the White House reiterated President Barack Obama’s support for a new ban on assault weapons and lawmakers called for stricter gun-control laws.

“This decision allows us to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate” on gun control, Cerberus said in a statement issued just after midnight in New York.

The firm made its initial firearms investment in 2006, when it bought the maker of the Bushmaster semi-automatic rifle, the weapon authorities say Adam Lanza used on his Dec. 14 rampage at Sandy Hook elementary school in Newtown, Connecticut, before killing himself. The father of Stephen Feinberg, chief executive officer of Cerberus, lives in Liberty at Newtown, a community for residents who are older than 55 that is about 6 miles (10 kilometers) from the school.

Strategic Buyers

Cerberus invested $157.8 million of equity in Freedom Group and held a 94 percent ownership stake, according to a May 2010 regulatory filing.

Feinberg made the decision to sell the company late yesterday and within hours the firm released the statement, according to a person familiar with Cerberus. The firm expects to sell Freedom Group at a discount because it can’t wait for the best possible price as lawmakers debate gun control, said the person, who requested anonymity because the process is private. Cerberus wasn’t responding to any pressure from clients, the person said.

Peter Duda, a spokesman for Cerberus at Weber Shandwick, declined to comment on the proposed sale. Feinberg declined to be interviewed.

The firm is seeking to hire bankers in the coming weeks to start shopping Freedom Group, according to the person. Strategic buyers would probably show the most interest, the person said, suggesting as one possibility Alliant Techsystems Inc. (ATK), the Arlington, Virginia-based maker of weapons and space systems.

Remington Arms

Amanda Covington, a spokeswoman for Alliant, didn’t immediately respond to an e-mail request for comment.

Freedom Group’s publicly traded competitors include Smith & Wesson Holding Corp. (SWHC) and Sturm Ruger & Co. (RGR), which trade at multiples of about 4.5 and 6.2 times enterprise value to trailing 12-month earnings before interest, taxes, depreciation and amortization, respectively, according to data compiled by Bloomberg. A sale of the company at the lower multiple would mean a price of about $706 million. At the higher multiple, the company would fetch about $957 million, which would more than triple the value of Cerberus’s investment.

Cerberus grew the company through acquisitions, including the purchase of Remington Arms Co. in 2007, and named the business Freedom Group.

Biggest Gunmaker

The company is the nation’s biggest manufacturer of guns and ammunition, with nine plants and 3,100 employees. Smith & Wesson and Sturm Ruger, which make similar military-style weapons, fell for a third day in New York trading as investors shunned firearms makers.

Smith & Wesson slumped 10 percent to close at $7.79 in New York, bringing its decline in the past three trading sessions to 18 percent. Sturm Ruger slid 7.8 percent today to $40.60, bringing losses to 15 percent during the same period.

Representatives from Smith & Wesson, Sturm Ruger and National Shooting Sports Foundation, a firearms-industry trade group, didn’t return phone messages seeking comment.

Cerberus, founded in 1992 by Feinberg, a former Drexel Burnham Lambert trader, oversees about $20 billion in assets, including private equity and hedge funds. It once owned Chrysler Corp.

Calsters Review

“Our role is to make investments on behalf of our clients who are comprised of the pension plans of firemen, teachers, policemen and other municipal workers and unions, endowments, and other institutions and individuals,” Cerberus said in the statement. “It is not our role to take positions, or attempt to shape or influence the gun-control policy debate. That is the job of our federal and state legislators.”

The California State Teachers’ Retirement System, which has $751 million overseen by Cerberus, said today it’s reviewing its $600 million investment in two Cerberus funds that are invested in Freedom Group. Calsters, with $155 billion in assets as of Oct. 31, is the second-largest U.S. pension fund. The largest is the California Public Employees’ Retirement System, with $241 billion.

Calsters “has established a thorough vetting process for potential investments that seeks to test not only their financial potential, but their social, human and environmental impacts as well,” the system said in a statement. “Moving forward, CalSTRS will work to ensure that all of our investments are taking these very important criteria into consideration.”

New York

The New York State Common Retirement Fund, which manages $150 billion, is also reviewing its investments in gunmakers, according to Eric Sumberg, a spokesman for State Comptroller Thomas DiNapoli.

“As investors, we support Cerberus Capital Management for taking action today to sell its stake in the Freedom Group,” Sumberg said today in an e-mail.

New York City pension funds are reconsidering about $18 million in the stocks of Smith & Wesson, Sturm Ruger and two other companies whose businesses include gun manufacturing.

“We are currently conducting a review of our holdings and aggressively exploring all options, including divestment,” Matthew Sweeney, a spokesman for Comptroller John C. Liu, said in an e-mailed statement.

Cerberus filed to take Freedom public in October 2009. It pulled the offering in April 2011 after the gun market slowed and Freedom Group CEO Theodore Torbeck resigned.

The business has picked up. The company, based in Madison, North Carolina, reported sales of $677 million this year through Sept. 30, an increase of 20 percent from the same period in 2011, according to a Nov. 15 filing with the U.S. Securities and Exchange Commission. Adjusted earnings before interest, taxes, depreciation and amortization rose 43 percent to $118 million.

Younger Shooters

“In many areas, the market is expanding quicker than the industry can increase production,” Freedom Group said in the filing. “Our company is experiencing strong demand for modern sporting firearms and handguns.”

Growth areas include the U.S. government, military and law enforcement, the company said.

About 60 percent of the company’s revenue this year derived from the sale of firearms, including sporting shotguns, rifles, handguns and guns that can be modified. The remainder came from ammunition and reloading components, as well as accessories, apparel and other shooting products, according to the filing.

“We believe the industry is also experiencing trends toward increased recreational and shooting sports and home defense,” Freedom Group said. “Further, we believe the adoption of the modern sporting rifle has led to increased long- term growth in the long gun market while attracting a younger generation of shooters.”

Father Speaks

The Newtown massacre was the deadliest in the U.S. since 33 people died in a 2007 rampage at Virginia Polytechnic Institute and State University in Blacksburg, Virginia.

The shooting was “devastating,” Martin Feinberg said today in a brief interview in the lobby of his building. “It’s horrendous, truly horrendous.”

Stephen Feinberg, 52, grew up in Spring Valley and Yonkers, New York, according to his father, who was dressed casually and sat in an armchair. He said he was “very proud” of his son.

Obama met yesterday with Vice President Joe Biden, senior aides and Cabinet members including Attorney General Eric Holder to discuss ways to respond to the tragedy, according to a White House official with knowledge of the session.

“The president’s position on the assault weapons ban hasn’t changed,” White House spokesman Jay Carney told reporters yesterday. “He still supports its re-enactment.”

Senate Legislation

U.S. Senator Dianne Feinstein, a California Democrat, said she’ll introduce in the new Congress convening in January legislation to reinstate a federal ban on assault weapons that expired in 2004. Senator Frank Lautenberg, a New Jersey Democrat, said he plans to reintroduce his bill banning high- capacity gun magazines, which were used in several shootings, including at Sandy Hook elementary.

Changes in firearm regulations could “materially adversely” affect Freedom Group by restricting the types of guns it can make or sell, or by adding costs to those processes, the company said in its filing.

“Regulatory proposals, even if never enacted, may affect firearms or ammunition sales as a result of consumer perceptions,” said Freedom Group.

To contact the reporters on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net; David Carey in New York at dcarey13@bloomberg.net; Cristina Alesci in New York at calesci2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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