Cerberus moves to allow investors to exit Freedom Group-sources

Reuters

By Greg Roumeliotis, Michelle Sierra and Olivia Oran

Dec 8 (Reuters) - Cerberus Capital Management LP is workingon a mechanism that would allow its fund investors to exitFreedom Group Inc, the maker of the Bushmaster rifle used in theNewtown, Connecticut school shooting rampage, people familiarwith the matter said on Sunday.

The move comes a year after the New York-based privateequity firm said it would sell Freedom Group, a pledge that wasmade four days after 26 people, most of them children, werekilled at the Sandy Hook Elementary School in Newtown.

It is the clearest indication yet that Cerberus has beenstruggling to sell Freedom Group amid reluctance from WallStreet banks to finance such a transaction, though peoplefamiliar with the matter said efforts were continuing to attracta feasible offer.

Full details of the mechanism were not disclosed but thesources said Cerberus would seek a credit amendment withexisting lenders of Freedom Group on Monday for a new debtfacility in a conference call organized by Bank of AmericaMerrill Lynch.

The new debt will come from an undisclosed financialinstitution, that will also make an equity investment in FreedomGroup, the people said. The money will be used to offer thoseCerberus fund investors wishing to divest their equity interestin Freedom Group the option to do so, the people added.

It should become apparent in the next two weeks whetherCerberus decides to use this mechanism instead of pursuing anoutright sale of Freedom Group, the people said.

The sources, who spoke on condition of anonymity becausethey were not authorized to speak to the media, did not disclosethe size of the equity and debt investments or the valuation atwhich Cerberus fund investors could decide to exit FreedomGroup. Many details were yet to be determined, they added.

Cerberus and Bank of America declined to comment whileFreedom Group representatives did not respond to requests forcomment.

Cerberus' fund investors include some of the largest U.S.public pension funds as well as endowments and insurance firms.Some of them, such as California State Teachers' RetirementSystem and University of California, said after the Newtownshootings that they would review their gun investments,including the Cerberus funds that owned Freedom Group.

Cerberus founder and CEO Stephen Feinberg dropped plans lastsummer to offer to buy Freedom Group on expectations thatanother buyer, willing to pay enough to the investors so thatthey would not take a loss, would emerge, people familiar withmatter said in July.

GUN SALES ON THE RISE

On Dec. 14, 2012, 20-year-old Adam Lanza, who had grown upin Newtown, killed his mother before driving to the school,where he killed 20 children and six adults. He then turned thegun on himself.

The massacre inspired a package of national gun controlmeasures in Congress as well as calls for better security inschools, including the presence of armed guards.

The bills, which included a national ban on assault weaponsand expanding the use of background checks for gun purchases,were ultimately rejected after U.S. lawmakers decided they wouldhave interfered with Americans' constitutional right to beararms.

Still, speculation over legislation limiting gun rights haspersisted, driving up sales of fire arms as well as the sharesof gun makers in the stock market. Sturm Ruger & Co Inc shares are up 60 percent so far this year and Smith & WessonHolding Corp shares are up 42 percent, while the S&P500 Index is up 25 percent.

Freedom Group itself has posted bumper profits so far thisyear. Nine-month net sales to the end of September were $1.02billion, up 51 percent year-on-year, while nine-month net incomewas $94.2 million, up from just $300,000 a year ago, accordingto the company's latest earnings statement.

Cerberus has also come under pressure in recent months fromseveral anti-gun groups and politicians, including New York CityMayor-elect Bill de Blasio, to expedite its efforts to sellFreedom Group.

Some of the top public pension funds in the United States,including California State Teachers' Retirement System and NewYork City Employees' Retirement System, dumped their shares ofgun makers in the aftermath of the Newtown massacre.

The New York-based private equity firm struggled to find aninvestment bank willing to take on the perceived reputationalrisk associated with Freedom Group before hiring Lazard Freres &Co LLC as an adviser on the auction, according to peoplefamiliar with the matter.

Cerberus registered Freedom Group for an IPO in 2009 butpulled the filing in 2011 amid slowing gun sales and theresignation of Chief Executive Ted Torbeck. The company is nowheaded by former Cerberus managing director George Kollitides.

Cerberus bought firearms maker Bushmaster in 2006 and latermerged it with other gun companies to create Freedom Group.

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