Shortly after 1 a.m. on a day nearly a year ago, Cerberus Capital Management announced that it planned to sell its gun manufacturing company, the Freedom Group, after the deadly school shooting in Connecticut four days earlier.
But the efforts to sell the company, which produced the Bushmaster rifle that Adam Lanza used in his assault on Sandy Hook Elementary School in Newtown, Conn., have been hamstrung by the public furor that prompted the auction in the first place.
It is a predicament that Cerberus, a $20 billion private equity and hedge fund investor, could have hardly predicted when it bought Bushmaster Firearms seven years ago. Cerberus, named for the multiheaded beast that guards the Greek underworld, used the company as a platform for other acquisitions like Remington Arms, the country’s oldest gun maker, and Marlin Firearms.
Instead of selling the company, executives from the Freedom Group explained on Monday during a conference call with about 35 creditors that Cerberus was working on a new step: helping its investors who were seeking to distance themselves from the industry sell their interests in the firearms maker.
The decision highlights the rocky sales process that Cerberus began last December. Despite hopes for a quick sale, the potential buyers backed away and some lenders declined to finance bids.
The proposal outlined on Monday, in which a new investor would take a minority stake and provide $200 million in new debt, would be only an interim step in Cerberus’s efforts, people briefed on the matter insist. The firm may still pursue a sale, an initial public offering or some other transaction afterward â€" or instead of â€" the recapitalization.
Coincidentally, the norms of the private equity industry would generally dictate that the Freedom Group be sold around now anyway. Leveraged buyout firms generally hold onto their investments for five to seven years. Indeed, Cerberus tried taking the gun maker public in 2009, but poor stock market conditions forced it first to postpone an initial offering and then call it off altogether two years later.
By the time that Cerberus announced its plans to sell the company last December, protesters were calling for a ban on semiautomatic rifles like the Bushmaster model that Mr. Lanza used, an AR-15 style derived from military models. Shares in other gun manufacturers, including Smith & Wesson and Sturm, Ruger & Company, plummeted amid the prospect of gun control, lowering the potential value of privately held companies like the Freedom Group as well.
“It is apparent that the Sandy Hook tragedy was a watershed event that has raised the national debate on gun control to an unprecedented level,†the firm said in its statement at the time.
“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.â€
Others moved to act by the Newtown shooting were Cerberus’s own investors. Public pension funds like the California State Teachers’ Retirement System, or Calstrs, and New York State’s comptroller publicly declared that they wanted to sell their holdings in gun makers.
Such investors hold only small stakes in the Freedom Group â€" Calstrs owned about 2.5 percent of the company last year â€" but can exert enormous influence on their money managers.
Still, despite the controversy, Cerberus thought that it could fetch more than $1 billion. The company was profitable for most of the last two years before the shooting, as gun sales rose during the Obama administration. In the quarter before the Newtown shooting, it reported nearly $238 million in sales, while it swung to a $16.1 million gain from a loss in the previous year.
Even after Newtown, the Freedom Group’s sales rose, spurred by customers fearful that tougher new regulations would make buying firearms more difficult. Its sales in the second quarter this year jumped to $353.2 million, its highest level in at least five years.
Yet from the beginning of the latest sales process, Cerberus encountered hurdles in trying to dispose of the company. Some banks declined to take on the assignment, fretting about the potential hit that their reputations may suffer. The firm eventually turned to Terry Savage at Lazard, a senior deal maker who is close to the investment firm and its chief executive, Stephen A. Feinberg.
The absence of big banks like JPMorgan Chase and Credit Suisse, which have rarely advised or lent money to firearms manufacturers, made it difficult not only for Cerberus but also for potential buyers for the business. Rival gun manufacturers like Sturm, Ruger and Smith & Wesson are either the Freedom Group’s size or smaller, requiring them to take on debt to pay for a deal.
Leveraged buyout firms also often require sizable amounts of financing to pay for their transactions. They faced an additional problem. Like Cerberus, some of their own investors were eager to wash their hands of investments in the gun industry, limiting their ability to bid for the company.
The Freedom Group’s owner, which had already earned a profit from its investment through a dividend payment, had been pushing for what some bidders deemed a high valuation of the company. However, some people briefed on the sales process argued that the expected price was based on a multiple of earnings lower than what some of the gun maker’s peers commanded in the public markets.
For much of this year, Cerberus heard from a number of interested suitors, some of whom walked away and others who failed to meet seller expectations, according to people briefed on the process.
Worried that the chances of a sale were fading, Mr. Feinberg himself weighed making a bid for the Freedom Group along with a number of other wealthy individuals. Such a move, one that would have created numerous financial and legal complications, would have at least established a floor for other offers in the auction process.
Ultimately, Mr. Feinberg decided against making an offer.
During that time, Cerberus briefed investors on its efforts. Those limited partners have largely supported the firm in public, even as they professed an eagerness to rid themselves of the business.
“Cerberus really has made an honest effort and tried but it’s been a tough year for them,†Christopher Ailman, the chief investment officer of Calstrs, told Bloomberg Television last week. “It’s a tough sale because the company has baggage.â€
As the auction process stalled, Cerberus began working on other moves that could solve investors’ issues. What has emerged so far is what the Freedom Group executives presented to their creditors on Wednesday.
An unidentified financial firm has provisionally committed to providing about $200 million in debt financing and buying a minority stake in the firearm producer. Proceeds from that investment would be used to buy out the stakes held by Cerberus limited partners eager to sell.
During the call â€" hosted by Bank of America, which serves as the administrative agent for the Freedom Group’s publicly traded debt â€" a number of participants asked questions about the plan, according to a person briefed on the matter. None publicly expressed opposition to the move.
For the proposal to move forward, creditors must approve the Freedom Group taking on the additional debt. Should they assent, a deal with the third-party investor could be approved quickly.
Then Cerberus would have slightly more flexibility in its options for the gun maker, including a potentially longer time frame for an outright sale or some other transaction. It may also decide to scrap the current investment plan altogether if a more compelling opportunity arises.
