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Published: Sunday, 12/11/2011

Company buying up big names in guns

Private-equity Cerberus forms Freedom Group

NEW YORK TIMES

SCARBOROUGH, Maine -- Lined up in a gun rack beneath mounted deer heads is a Bushmaster Carbon 15, a matte-black semiautomatic rifle that looks as if it belongs to a SWAT team. On another rack rests a Teflon-coated Prairie Panther from DPMS Firearms, a supplier to the U.S. Border Patrol and security agencies in Iraq. On a third is a Remington 750 Woodsmaster, a popular hunting rifle.

The variety of rifles and shotguns on sale here at Cabela's, the national sporting goods chain, is a testament to America's enduring gun culture. But, to a surprising degree, it is also a testament to something else: Wall Street deal-making.

In recent years, many top-selling brands -- including the 195-year-old Remington Arms, as well as Bushmaster Firearms and DPMS, leading makers of military-style semiautomatics -- have quietly passed into the hands of a single private firm. It is called the Freedom Group -- and it is the most powerful and mysterious force in the U.S. commercial gun industry today.

Never heard of it?

You're not alone. Even within gun circles, the Freedom Group is something of an enigma. Its rise has been so swift that it has become the subject of wild speculation and grassy-knoll conspiracy theories. In the realm of consumer rifles and shotguns -- long guns, in the trade -- it is unrivaled in its size and reach. By its own count, the Freedom Group sold 1.2 million long guns and 2.6 billion rounds of ammunition in the 12 months ended March, 2010, the most recent year for which figures are publicly available.

Behind this giant is Cerberus Capital Management, the private investment company that first came to widespread attention when it acquired Chrysler in 2007. With far less fanfare, Cerberus, through the Freedom Group, has been buying big names in guns and ammo.

From its Manhattan headquarters, Cerberus has assembled a remarkable arsenal. It began with Bushmaster, which until recently was based in Maine. Unlike military counterparts like automatic M-16s, rifles like those from Bushmaster don't spray bullets with one trigger pull. But, with gas-powered mechanisms, semiautomatics can fire rapid follow-up shots as fast as the trigger can be squeezed. They are often called "black guns" because of their color.

After Bushmaster, the Freedom Group moved in on Remington, which traces its history to the days of flintlocks and today is supplying M24 sniper rifles to the government of Afghanistan and making handguns for the first time in decades. The group also has acquired Marlin Firearms, which turned out a special model for Annie Oakley, as well as Dakota Arms, a maker of high-end big-game rifles. It has bought DPMS Firearms, another maker of semiautomatic, military-style rifles, as well as manufacturers of ammunition and tactical clothing.

"We believe our scale and product breadth are unmatched within the industry," the Freedom Group said in a filing last year with the Securities and Exchange Commission.

Some gun enthusiasts have claimed that the power behind the company is George Soros, the hedge-fund billionaire and liberal activist. Mr. Soros, these people have warned, is buying U.S. gun companies so he can dismantle the industry, Second Amendment notwithstanding.

The chatter grew so loud that the National Rifle Association issued a statement in October denying the rumors.

Mr. Soros isn't behind the Freedom Group, but, ultimately, another financier is: Stephen A. Feinberg, the chief executive of Cerberus.

Cerberus is part of one of the signature Wall Street businesses of the past decade: private equity. Buyout kings like Mr. Feinberg, 51, try to acquire undervalued firms, often with borrowed money, fix them up, and either take them public or sell at a profit.

Before the financial crisis of 2008, scores of well-known U.S. firms, from Chrysler down, passed into the hands of private-equity firms. For the financiers, the rewards were often enormous. But some firms that they acquired later ran into trouble, in part because they were burdened with debt from the takeovers.

Mr. Feinberg, a Princeton graduate who began his Wall Street career at Drexel Burnham Lambert, the junk bond powerhouse of Michael R. Milken fame, got into private equity in 1992. Today, he presides over a private empire that rivals some of the mightiest public firms in the land. Cerberus manages more than $20 billion in capital. Together, the firms it owns generate annual revenue of about $40 billion -- more than Amazon or Coca-Cola last year.

Why Cerberus went after gun companies isn't clear. Steven N. Kaplan, a professor at the University of Chicago Booth school of business and a private-equity expert, said of Cerberus: "They must have decided there is an opportunity to make money by investing in the firearms industry and trying to build a big company."

Freedom Group has sold weapons to the governments of Afghanistan, Thailand, Mexico, and Malaysia, among others, and obtained business from the U.S. Army, including a contract worth up to $28.2 million, to upgrade the M24 sniper weapon system.

Cerberus brings some connections to the table. The longtime chairman of its global investments group is Dan Quayle, the former vice president. The Freedom Group, meantime, has added two retired generals to its board.

Jessica Kallam, a spokesman at the Freedom Group, said executives there declined to comment for this article.

The old Bushmaster factory in Windham, Maine, squats in an unassuming office park on the Roosevelt Trail.

But Cerberus representatives who arrived here in 2005 clearly saw potential. Inside, several dozen gunsmiths, working by hand, were fitting together 6,000 to 7,000 weapons a month. At the time, Bushmaster was thriving, although it had been stung by bad publicity stemming from the Beltway sniper shootings.

Richard Dyke, then the principal owner and chairman of Bushmaster, bought a bankrupt gun-maker in Bangor, Maine, for $241,000 in 1976, moved it to Windham, and later changed its name to Bushmaster. The firm had patents on semiautomatic weapons designed for the military and police, but he added military-style firearms for civilians.

Mr. Dyke says he's not sure why Bushmaster caught the eye of Cerberus.

At the time, Bushmaster had $85 million in annual sales and about several million dollars in debt, he said. In April, 2006, he sold the firm to Cerberus for about $76 million, he says, and Cerberus rented the Bushmaster plant here for five years. The next year, Cerberus formed the Freedom Group. Now Bushmaster is gone from Maine.

Remington has been producing guns since 1816, when, according to lore, Eliphalet Remington made a flintlock rifle in his father's forge in Ilion Gulch, in upstate New York.

In 2007, the Freedom Group swooped in and bought Remington for $370 million, including $252 million in assumed debt. In one stroke, the Freedom Group gained one of the most famous names in U.S. firearms, the largest domestic maker of shotguns and rifles, and a major manufacturer of ammunition.

Next, the Freedom Group in rapid succession went after other firearms companies: DPMS; Marlin Firearms, a classic maker that came with two niche shotgun brands, Harrington & Richardson and L.C. Smith, and Dakota Arms. The Freedom Group also bought S&K industries, which supplies wood and laminate for gun stocks, as well as the Advanced Armament Corp., which makes silencers. It acquired Barnes Bullets, which makes copper-jacketed bullets popular with precision shooters and police departments. The more the company diversifies its portfolio, analysts say, the more it has to offer to firearms distributors and leading retailers like Wal-Mart and Cabela's.

What is left? The Freedom Group does not own the Smith & Wesson Holding Corp. or Sturm, Ruger, both publicly traded. Nor does it own the Colt's Manufacturing, which is privately owned.

Cerberus also does not own Winchester Repeating Arms or Browning, both part of the Herstal Group of Belgium.

After a tough 2010, gun sales at the Freedom Group were up 5.6 percent during the first nine months of this year, although the company reported a net loss of $6.3 million for the same time period, according to the company's most recent earnings report.



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