Cerberus CEO drops stalking horse bid for Freedom Group: source

NEW YORK Wed Jul 3, 2013 5:31pm EDT

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NEW YORK (Reuters) - Stephen Feinberg has scrapped a bid for the maker of the Bushmaster rifle, which his private equity firm, Cerberus Capital Management LP, put up for a sale after one of its guns was used in the Newtown, Connecticut school shooting in December, a person familiar with the matter said on Wednesday.

Freedom Group's AR-15 type Bushmaster rifle was used in the shootings at Sandy Hook Elementary School in Newtown, where 20 children and six adults were killed. Soon after the shootings, Cerberus said it would look for a buyer and hired investment bank Lazard Ltd (LAZ.N) to help sell the business.

Cerberus CEO Feinberg decided to put together a consortium to make a stalking horse offer for Freedom Group in order to spur competition, people familiar with the matter told Reuters in April.

Feinberg no longer sees the need to make an offer for the gun company, because Freedom Group is in dialogue with a number of industry players, as well as financial investors, and he views the sale process as robust, the person said on Wednesday.

No deal has been agreed to and talks with the potential buyers are ongoing, the person added.

Cerberus declined to comment, while Freedom Group did not respond to a request for comment.

Banking sources had previously told Reuters that major Wall Street firms had been unwilling to finance a bid for Freedom Group. Feinberg's decision to drop his stalking horse bid indicates the sale process may have turned out to be more robust than he had expected.

The stocks of publicly traded gun makers such as Smith & Wesson Holding Corp (SWHC.O) and Sturm Ruger & Co (RGR.N), which fell after the shooting, have since recovered, and in April a background checks bill that enjoyed broad popular support failed in the U.S. Senate over gun control concerns.

Had the bid by Feinberg for a company that his firm owns proceeded, it would have been a rare move in the private equity industry.

It had the potential to raise conflict of interest issues, as it could pit the founder's interest against those of the investors in Cerberus funds, known as limited partners.

Among the measures that Cerberus introduced to address such concerns were an independent committee of Freedom Group's board of directors as well as a special shareholders' committee to assess offers. This shareholder committee will now be disbanded, the person familiar with the matter said.

Cerberus bought firearms maker Bushmaster in 2006 and later merged it with other gun companies to create Freedom Group. The company's sales rose about 20 percent to $931.9 million in 2012.

In May, Cerberus completed fundraising for its latest flagship private equity fund, raising $2.61 billion to invest in distressed assets, less than the $3.75 billion fundraising target it originally had.

(Reporting by Greg Roumeliotis and Olivia Oran in New York; Editing by Steve Orlofsky)

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