Dec 8 Cerberus Capital Management LP is working
on a mechanism that would allow its fund investors to exit
Freedom Group Inc, the maker of the Bushmaster rifle used in the
Newtown, Connecticut school shooting rampage, people familiar
with the matter said on Sunday.
The move comes a year after the New York-based private
equity firm said it would sell Freedom Group, a pledge that was
made four days after 26 people, most of them children, were
killed at the Sandy Hook Elementary School in Newtown.
It is the clearest indication yet that Cerberus has been
struggling to sell Freedom Group amid reluctance from Wall
Street banks to finance such a transaction, though people
familiar with the matter said efforts were continuing to attract
a feasible offer.
Full details of the mechanism were not disclosed but the
sources said Cerberus would seek a credit amendment with
existing lenders of Freedom Group on Monday for a new debt
facility in a conference call organized by Bank of America
The new debt will come from an undisclosed financial
institution, that will also make an equity investment in Freedom
Group, the people said. The money will be used to offer those
Cerberus fund investors wishing to divest their equity interest
in Freedom Group the option to do so, the people added.
It should become apparent in the next two weeks whether
Cerberus decides to use this mechanism instead of pursuing an
outright sale of Freedom Group, the people said.
The sources, who spoke on condition of anonymity because
they were not authorized to speak to the media, did not disclose
the size of the equity and debt investments or the valuation at
which Cerberus fund investors could decide to exit Freedom
Group. Many details were yet to be determined, they added.
Cerberus and Bank of America declined to comment while
Freedom Group representatives did not respond to requests for
Cerberus' fund investors include some of the largest U.S.
public pension funds as well as endowments and insurance firms.
Some of them, such as California State Teachers' Retirement
System and University of California, said after the Newtown
shootings that they would review their gun investments,
including the Cerberus funds that owned Freedom Group.
Cerberus founder and CEO Stephen Feinberg dropped plans last
summer to offer to buy Freedom Group on expectations that
another buyer, willing to pay enough to the investors so that
they would not take a loss, would emerge, people familiar with
matter said in July.
GUN SALES ON THE RISE
On Dec. 14, 2012, 20-year-old Adam Lanza, who had grown up
in Newtown, killed his mother before driving to the school,
where he killed 20 children and six adults. He then turned the
gun on himself.
The massacre inspired a package of national gun control
measures in Congress as well as calls for better security in
schools, including the presence of armed guards.
The bills, which included a national ban on assault weapons
and expanding the use of background checks for gun purchases,
were ultimately rejected after U.S. lawmakers decided they would
have interfered with Americans' constitutional right to bear
Still, speculation over legislation limiting gun rights has
persisted, driving up sales of fire arms as well as the shares
of gun makers in the stock market. Sturm Ruger & Co Inc
shares are up 60 percent so far this year and Smith & Wesson
Holding Corp shares are up 42 percent, while the S&P
500 Index is up 25 percent.
Freedom Group itself has posted bumper profits so far this
year. Nine-month net sales to the end of September were $1.02
billion, up 51 percent year-on-year, while nine-month net income
was $94.2 million, up from just $300,000 a year ago, according
to the company's latest earnings statement.
Cerberus has also come under pressure in recent months from
several anti-gun groups and politicians, including New York City
Mayor-elect Bill de Blasio, to expedite its efforts to sell
Some of the top public pension funds in the United States,
including California State Teachers' Retirement System and New
York City Employees' Retirement System, dumped their shares of
gun makers in the aftermath of the Newtown massacre.
The New York-based private equity firm struggled to find an
investment bank willing to take on the perceived reputational
risk associated with Freedom Group before hiring Lazard Freres &
Co LLC as an adviser on the auction, according to people
familiar with the matter.
Cerberus registered Freedom Group for an IPO in 2009 but
pulled the filing in 2011 amid slowing gun sales and the
resignation of Chief Executive Ted Torbeck. The company is now
headed by former Cerberus managing director George Kollitides.
Cerberus bought firearms maker Bushmaster in 2006 and later
merged it with other gun companies to create Freedom Group.