Four months after the investment firm Cerberus put the country’s largest gun company up for sale in the wake of the school shootings in Connecticut, it has found a possible buyer in Cerberus’s owner, Stephen A. Feinberg.
Mr. Feinberg is contemplating a bid for the Freedom Group, which makes Bushmaster rifles, one of which was used in the Sandy Hook Elementary School massacre in Newtown, Conn., according to two people briefed on the matter. He has reached out to friends and other wealthy investors about teaming up on a potential offer, these people said.
The bid would be what is called a stalking horse bid, essentially setting the floor for other offers in the auction process.
A bid by Mr. Feinberg presents a host of potential conflicts of interest. It is exceedingly rare, if not unprecedented, for the owner of a private equity fund to purchase a company owned by the fund. In order to entertain a bid by Mr. Feinberg, these people said, Cerberus Capital Management and the Freedom Group would adopt several measures to avoid any perception of inside dealing and to prevent a sweetheart deal for Mr. Feinberg at the expense of his investors.
Some of those investors are state pension funds that had pressed Cerberus to sell the Freedom Group after the Connecticut shootings. Large public funds like the California State Teachers’ Retirement System urged Cerberus to divest its gun holdings.
After the Connecticut killings, Cerberus decided to distance itself from the politically charged issue of gun control by disposing of the Freedom Group. It issued a statement after the shootings, expressing its condolences and announcing that it was putting the company up for sale and would return the proceeds to its investors.
“We believe that 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 that is more properly pursued by those with the formal charter and public responsibility to do so,†said Cerberus, which hired the investment bank Lazard to handle the auction process.
Yet were Mr. Feinberg to buy the Freedom Group, he would presumably remain in the center of the gun control debate. And it would run counter to his vow to steer clear of lightning-rod investments after he came under an uncomfortable spotlight with Cerberus’s audacious boom-era purchases of the automaker Chrysler and the finance arm of General Motors.
Cerberus built the Freedom Group into the nation’s largest gun maker by collecting at least 10 different smaller ones under one corporate umbrella, including Bushmaster, Remington Arms and Marlin Firearms. The company, which is based in Madison, N.C., posted about $930 million in revenue last year. A planned initial public offering of the company, first filed in 2009, has stalled, but Cerberus and its investors have already made a profit on the deal through a dividend payment.
The Freedom Group has continued to add companies, purchasing five business last year. Its acquisitions include Tapco, which markets magazines for assault rifles, and Para-USA, which produces 1911-style pistols. The Freedom Group also appears to be branching into pet products, having bought Dublin Dog, a maker of collars and leashes. (It also owns Mountain Khakis, the outdoor apparel brand.)
A sale is expected to fetch about $1 billion, people briefed on the deal said. About 25 possible buyers are looking at Freedom Group’s financials, but first-round bids have yet to be submitted. A transaction could be completed as earlier as this summer, these people said.
It is unclear whether a buyer will materialize. The forced sale of a company is a poor position for a private equity firm to find itself in, let alone the sale of a controversial one. Other firms that have public pension funds as investors are not interested in the deal, said a person familiar with the talks. Lawmakers have also urged large banks not to provide financing to gun companies, another pressure point that could pose challenges to any deal.
Potential buyers include Freedom Group’s rivals, such as the American company Smith & Wesson and the Brazilian gun maker Taurus. Another group of potential purchasers include wealthy individual investors.
An auction that included a bid by a consortium led by Mr. Feinberg would have numerous special conditions to ensure a fair process, people briefed on the sale said. Because Mr. Feinberg sits on Freedom Group’s board, the company would have to form special committees excluding Mr. Feinberg from negotiations. Another possible measure would force Mr. Feinberg drop out of the bidding if another party offers a certain percentage above his bid.
A spokesman for Cerberus, Tim Price, declined to comment.
Mr. Feinberg, 53, grew up in Spring Valley, N.Y., and started his career at Drexel Burnham Lambert, where he worked under the junk-bond financier Michael Milken. He started Cerberus about 20 years ago, and it now manages more than $20 billion in private equity and hedge fund assets. A major Republican donor, Mr. Feinberg is an ardent hunter and gun enthusiast. His father, Martin Feinberg, lives in Newtown, a fact that Cerberus said played no role in its decision to sell the Freedom Group.
