Cerberus dumping gun maker from holdings The Bottom Line Investor says debate belongs to those with 'formal charter'

A photo of an actual Bushmaster Carbine with a 16 inch barrel. It can take twenty and thirty round mags and is toped with a 4 power scope and can hit an orange at 300 meters. The gun seized from two suspects in the Washington-area sniper shootings is a Bushmaster XM-15 M4 A3, a civilian version of the standard American military rifle, the M-16, according to officials of its manufacturer, Bushmaster Firearms. Bushmaster Firearms is a small privately owned company in Windham, Maine., that specializes in making copies of the M-16. (Kevin Wilson/The Ledger, Lakeland Fla.) less A photo of an actual Bushmaster Carbine with a 16 inch barrel. It can take twenty and thirty round mags and is toped with a 4 power scope and can hit an orange at 300 meters. The gun seized from two suspects in ... more Photo: Kevin Wilson, NYT Photo: Kevin Wilson, NYT Image 1 of / 4 Caption Close Cerberus dumping gun maker from holdings 1 / 4 Back to Gallery

Maybe the gun business isn't such a good investment after all. Especially when gun stocks take a nosedive and the political heat starts coming down on one of your cash cows. Cerberus Capital Management, one of the world's largest private-equity firms, announced Tuesday it was looking to immediately sell one of its holdings, Freedom Group, a gun manufacturing conglomerate whose products include the weapon that took the lives of 20 children and seven adults in Newtown, Conn.

"It is apparent that the Sandy Hook (Elementary School) tragedy was a watershed event that has raised the national debate on gun control to an unprecedented level," Cerberus said. "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."

What must also have been apparent to the $20 billion private-equity firm, which at one point owned Chrysler, was the hammering that publicly traded gun companies have taken since Friday. The stock price of companies such as Smith & Wesson and Sturm, Ruger & Co., which had been growing by leaps and bounds, have fallen dramatically since the school shooting. At Tuesday's close, Smith & Wesson's stock had fallen another 10 percent and Sturm, Ruger's by 7.75 percent.

Additionally troubling to Cerberus was Monday's announcement by the California State Teachers' Retirement System that it was taking a hard look at its $751.4 million investment with the New York firm, which includes the fund's 2.4 percent ownership stake in Freedom Group. On the same day, state treasurer Bill Lockyer said he would be pushing both the teachers' group and the California Public Employees' Retirement System - which earlier this year announced a $400 million investment in a Cerberus fund - to divest from companies manufacturing guns outlawed in California that "expose our communities to violence and death."

Company executives also must know that California Sen. Dianne Feinstein's push to revive a federal assault weapons ban - which President Obama said Tuesday that he supports - will most assuredly cover the Bushmaster .223, the semiautomatic rifle manufactured by one of Cerberus' acquired subsidiaries that was used to such unspeakable effect by Adam Lanza. In documents filed in 2010 in connection with a prospective IPO (not ultimately pursued), Freedom Group listed regulations limiting "assault rifles" and "armor piercing bullets" among the potentially "material adverse effects on our business, financial condition, results of operations or cash flows."

Executives may have also noticed that a major gun retailer, Dick's Sporting Goods, has already "suspended the sale of modern sporting rifles in all of our stores chain-wide." The Pennsylvania company would not say how long the suspension will last, nor what gun sales contribute to its bottom line, although CEO Edward Stack said last month that it had seen a boost in sales during the recent campaign season.

Walmart this week removed a listing of the Bushmaster .223 from its website "in light of the tragic events," but said it will continue to sell the model and others like it. While not disclosing specific numbers, Walmart previously said that revenue from gun sales had grown 76 percent in the first half of 2012. In its September quarterly report, Freedom Group said Walmart accounted for 13 percent of its sales in the first nine months of the year.

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Cerberus bought Bushmaster in 2006 at a time when the North Carolina company was doing exceptionally well - despite the $568,000 its insurance company coughed up to settle a suit arising out of the 2002 Beltway sniper case, in which the Bushmaster .223 was used to take down 13 people in the Washington, D.C., area.

After that, Congress, urged by the National Rifle Association, passed legislation that shielded gunmakers from similar claims.

Cerberus added several other manufacturers of "modern sporting rifles," including Remington, making it one of the biggest players in the civilian assault weapon business.

And it is not the only investment firm attracted by the industry's revenue potential. Michigan's Long Point Capital announced in January that it had tripled its 2004 investment in Savage Sports Holdings after selling the "premier provider of outdoor sportsman products" in a management buyout backed by Norwest Equity Partners in January.

Colt Defense, a manufacturer of popular "concealed carry" small arms (and submachine guns), is owned by a Credit Suisse fund and a separate fund advised by the giant Blackstone Group. The Vanguard Group and Black Rock - whose CEO, Larry Fink, has been mentioned as a possible Treasury secretary in Obama's second term - have significant stakes in Smith & Wesson and Sturm, Ruger. Other investment firms own or have pieces of companies that make accessories such as laser scopes and the kind of high-powered magazines that enabled Adam Lanza to kill so many 6- and 7-year-olds in such a short space of time.

In its September report, Freedom Group reported net sales of $667.3 million for the first nine months of the year, compared with $564.6 million in the same period in 2011, although a far smaller $300,000 net profit. The company has a lot of debt, despite the booming market in what gun control advocates have called "killing machines."

"I'm not surprised Cerberus would want to offload," said Kristen Rand, legislative director of the Violence Policy Center in Washington. "They thought the IPO was going to be the big money maker, but that didn't happen, and the business wasn't turning out to be quite as profitable as they thought. There are only two really profitable areas in the industry - assault rifles, which Cerberus has, and conceal-and-carry, which it doesn't. On the other hand, Sturm, Ruger and Smith & Wesson have both," she added.

Despite Cerberus' urgency to sell its gun business, Rand said she had "no idea" who would want to buy it right now. Not that Cerberus' decision is likely to result in a flood of exits in the wake of Friday's events.

"Sturm, Ruger and Smith & Wesson and others will be OK. Gun enthusiasts probably don't really care about Newtown - I know that sounds callous to say."

Writing in Slate magazine on Monday, which Cerberus executives perhaps saw, former New York Gov. Eliot Spitzer urged "every student at a university to ask the university if it is invested in Cerberus. Every member of a union should ask their pension-fund managers if they are invested. Cerberus would not be immune to pressure brought by its own investors."

Might that be applied, in the wake of Friday's events, to other financial enablers, or at least awaken more people from their long slumber in a land populated by an ever-growing number of civilian killing machines?

"We're very hopeful that this is going to be different from the previous shootings," said Rand.