Time is ripe for moguls to buy, close gun maker

2013-01-02T00:00:00Z Time is ripe for moguls to buy, close gun makerWilliam D. Cohan Bloomberg News Arizona Daily Star
January 02, 2013 12:00 am  • 

Business moguls who favor stricter gun-control laws - among them Bloomberg LP founder and New York City Mayor Michael Bloomberg, financier George Soros and entertainment honcho David Geffen - are in the special position of being able to put their money where their mouths are, and with a single bold move can change the raging gun debate in a way that intransigent politicians cannot.

These well-intentioned billionaires (and others) should buy Freedom Group Inc., the world's largest gun manufacturer, from Cerberus Capital Management, which has put it up for sale, and literally liquidate it.

The company's existing stockpile of guns - it has some $200 million in inventory, according to the latest quarterly report - can be melted down and turned into plowshares, or at least tasteful monuments to the horrors of gun violence, and installed in places such as Newtown, Conn.; Aurora, Colo.; Blacksburg, Va.; Tucson; Binghamton, N.Y.; and Fort Hood, Texas.

The idea isn't as implausible as it sounds. Cerberus, the secretive private-equity behemoth run by Steve Feinberg (whose father lives in Newtown), started assembling Freedom Group - the name has that delightful Orwellian spin - in 2006. Cerberus bought Bushmaster Firearms International (the company that manufactured the weapon used to murder 27 people in Newtown, including 20 first-graders) for $76 million, and then Remington Arms Co. for an additional $370 million.

Freedom Group's sales for the first nine months of 2012 and its adjusted earnings before interest, taxes, depreciation and amortization were $677 million and $118 million, respectively. The company's total long-term debt as of September was $652 million. In 2010, and again this year, Cerberus, which owns 95 percent of Freedom Group, took out two dividends totaling $248 million along with an additional $5.3 million in management fees. It is likely that between the dividends and its management fees, Cerberus has already taken out its initial equity investment and then some.

In the wake of the Newtown shootings, Cerberus - at the urging of a number of its largest institutional investors - announced it was putting Freedom Group up for sale and hiring Lazard Ltd. to manage the process.

So what might it cost the moguls to put the gun maker out of its misery? That is a function, of course, of the competition that Cerberus can drum up for the company. And there could be plenty. Both Smith & Wesson Holding Corp. and Sturm, Ruger & Co. are publicly traded. Colt's Manufacturing Co. is privately owned. Then there's Belgium's FN Herstal, which owns Winchester and Browning, and Forjas Taurus, a Brazilian gun manufacturer that has shown interest in buying Freedom Group.

Assuming that this may not be the best time to sell a major gun manufacturer after the various tragedies, perhaps Freedom could be had for about $800 million, or five times its expected 2012 adjusted earnings before interest, taxes, depreciation and amortization. After paying off the $531 million in net debt, Cerberus and its investors could still walk off with an additional $231 million in profit beyond what they have already taken out.

One problem for the moguls might well be that none of the purchase price could be financed. Not even a sympathetic bank, such as JPMorgan Chase, which shies away from financing "sin" companies, would be likely to provide a loan on a company that would be immediately closed down. The $800 million would have to come from their own deep pockets, and from like-minded individuals who share their vision. (I would happily contribute a few shekels to the syndication effort.)

Then there's the problem of the 3,000 or so people Freedom Group employs. It does seem unfair for them to lose their jobs just because they help to make guns that kill people and animals. Perhaps the moguls could also pony up for the cost of retraining these workers for other professions and for the cost of outplacement services.

William D. Cohan, the author of "Money and Power: How Goldman Sachs Came to Rule the World," was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase.

Copyright 2014 Arizona Daily Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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