Sandy Hook leads to corporate fallout, Freedom Group, Dick's Sporting Goods and more

Cerberus Capital Management, the company that owns the Freedom Group, a collection of shooting industry firms, will be selling off their interests in the gun world. This is a direct response to the Sandy Hook Elementary School shooting spree.

The Freedom Group is composed of more than a dozen names in the gun and gun accessory business, including the Advanced Armament Corporation, Barnes Bullets, DPMS Panther Arms, H&R, Marlin, Para USA, Remington, Tapco and Bushmaster.

The gunman was armed with several firearms, one of which was a Bushmaster rifle.

Cerberus had this to say:

“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 debate essentially focuses on the balance between public safety and the scope of the Constitutional rights under the Second Amendment. As a Firm, we are investors, not statesmen or policy makers. Our role is to make investments on behalf of our clients who are comprised of the pension plans of firemen, teachers, policemen and other municipal workers and unions, endowments, and other institutions and individuals. It is not our role to take positions, or attempt to shape or influence the gun control policy debate. That is the job of our federal and state legislators.”

“There are, however, actions that we as a firm can take. Accordingly, we have determined to immediately engage in a formal process to sell our investment in Freedom Group … 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.”

“Our thoughts and prayers are with the families and communities impacted by this tragic and devastating event.”

On the surface, as far as financial decisions go, this is a questionable move. Although stocks in gun companies have dropped somewhat following the Sandy Hook shooting spree, stock swings like this are temporary and often very quick to recover. The public demand for firearms is at a never before-seen high, with demand easily outstripping supply and people willing to pay prices that would have killed sales six months ago.

And Remington, which is part of the Freedom Group, is a major contender for the upcoming M4 carbine contract with the U.S. Army, supplanting Colt as the Army’s primary manufacturer of infantry rifles. That one contract is for $84 million.

That being said, the Freedom Group hasn’t quite been able to meet its expectations, financially, receiving B+ and B- S&P ratings on a recent $330 million term loan and $250 million in senior secured notes, respectively.

Another thing is that Cerberus manages over $500 million in teacher pension funds.

“The California State Teachers’ Retirement System (CalSTRS) committed to invest a whopping $500 million into a $7.5 billion Cerberus fund that has helped bankroll Freedom Group. That means that it effectively could own a 6.67% stake in the gun maker, which filed to go public in late 2009 before pulling the offering in early 2011. In fact, the figure could be even higher since CalSTRS also committed $100 million to a $1 billion predecessor fund, which likely made the original investment.”

It’s not like CalSTRS can simply pull their money out of the Freedom Group. They would have to sell their share of the investment. As it stands, they have only stated that they would reevaluate future indirect investments.

But in truth, it could just be personal, the father of Stephen Feinberg, founder of Cerberus, is a resident of Newtown, Connecticut, where the Sandy Hook shooting spree took place.

“The shooting was ‘devastating,’ Martin Feinberg said in a brief interview in the foyer of his building. ‘It’s horrendous, truly horrendous.'”

Freedom Group is likely to be broken up into its base companies and sold off over the course of months, and possibly even years, in a structured sale, as opposed to as fast as possible and to the first bidders.

Still, it may be possible for Cerberus to benefit from this financially, if they find the right buyers. Colt and FN both may be willing to acquire Remington in order to protect their military contracts alone. AAC is an industry leader; whoever owns them will have a major halo brand. The Freedom Group passed on a chance to go public a while back; they may be able to file again and use profits from going public to buy themselves.

Fact of the matter is that there are lots of big names in the gun industry that could improve themselves with a chunk of the Freedom Group, and we’re sure that many board rooms are heating up over the prospects of acquisition at this very moment.

Right now, emotions are running high, and personal issues are business issues. Cerberus isn’t the only entity willing to accept a financial loss in order to keep the peace with its customers.

Dick’s Sporting Goods has temporarily suspended the sale of “modern sporting rifles” nationwide, and has halted all gun sales and removed all firearm displays from its location closest to Newtown.

Walmart has also delisted Bushmaster rifles from their website, as well as removed them from in-store sales. Some reports indicate that they are pulling rifle magazines off shelves as well.

Cheaper Than Dirt announced today that it has suspended online gun sales while they review their policies.

Of course, when they go back on sale, we’re positive that more than a few people will be willing to pay a price premium to get these spotlit products, something Cheaper than Dirt, Walmart and Dick’s is sure to benefit from.

As tragic as the massacre at Sandy Hook Elementary was, the truth is that the popularity of guns is not going to drop; if anything, sales are going to ride as high as the political and emotional waves will carry them. These small drops in corporate capital will be brief, with actual gun sales filling the void in very short order.