Cerberus Capital and Freedom Group: Good for guns? What do Dan Quayle (Former U.S.

Vice President), John Snow (Former secretary of the U.S. Treasury), Bushmaster, Remington, Barnes Bullets, GMAC financing Group and Albertson s Grocery all have in common? They are all part of the Cerberus Capital Corporate ownership portfolio. That s not it however; the 25 billion dollar New York based private equity investment firm is the owner of over 10 prominent firearms industry brand names and has plans to buy more. But the real question is this: given the state of the economy, and all the politics involved with guns and private equity, is Cerberus stronghold on the industry really a good thing for guns? Most importantly to this analysis is the fact that Cerberus is not alone in its conglomerate ownership model, other industry players include BAE Systems Armor Holding Group, Smith and Wesson (itself a conglomerate company, with diverse brands) and the ATK Group (Alliant Tech Systems is a large public company with several ammunition and shooting industry brands). In fact most of the Firearms and ammunition industry recently underwent a massive consolidation phase starting about 15 years ago, with continuing consolidation and acquisition an ever present process. Many conglomerates exist outside of the U.S. as well (Armor Holdings is owned by the U.K. based BAE Systems, though operates AH in the U.S.): FN Herstal owns Winchester and Browning (of note) and Beretta S.p.A. owns a handful of major manufacturers outside of the U.S. which have a dramatic fiscal impact n the U.S. gun industry as well. The difference with Cerberus is this: they are massive, private, and own a much more diverse portfolio than any of the other world beaters mentioned above (at least in domestic production and footprint). The other main point with Cerberus: they don t seem to be showing any signs of stopping the consolidation. Because they are still private, the Monopoly laws are a bit easier to manipulate, and eventually their Freedom Group Unit could encapsulate an even larger portion of the Shooting sports and defensive firearms industry. Earlier this month (February 2012) Cerberus announced the purchase of Para Ordnance, a dedicated pistol manufacturer: Freedom Group s first pure pistol purchase. It was a sign that more consolidation was to come and even more control was soon to be shifted into the Cerberus portfolio. Farther back on the timeline Cerberus announced a spinoff IPO of its Freedom Group division, in October 2009, but in April 2011, it pulled the IPO in favor of a potential private equity fundraising campaign. This initial public offering filed in late 2009 was likely the culmination of an exit strategy planned long before all of the acquisition work. The fact that the public offering was pulled speaks to perhaps the acquisition of a few more major brand names. With its Para Ordnance purchase, Freedom group prove it was on the leading edge of the industry, and well aware that it needed more diversification in the group. Perhaps it was painfully aware that, despite the strong economic start to 2012 from a market perspective, the market wasn t going to tolerate a company with around a 10 million dollar loss on So many millions in sales. The Para Ordnance purchase put them in a better position to benefit from the hot segments I the market, and allows them to appeal to other big brands

without getting too invested in one segment of the market, so their intrinsic growth can be compounded much more through their already beneficial acquisition model. The companies that make up Freedom group are as follows: y y y y y y y y y y y Remington Bushmaster Harrington and Richardson Parker Guns DPMS Dakota Arms Eotac Barnes Bullets Mountain Khakis Advanced Armament Corporation Para Ordnance

The Freedom group owns some impressive real estate in the gun landscape, but in the end, will the almighty dollar spell bad news for gun owners, public perception or the industry? In a word: no. It s a model that works, in an industry that needs consolidation, and with a promising outcome for all involved. Sure there are the negatives of such a relationship, like: public perception (for instance the rumor that George Soros was a controlling investor, upsetting many firearms owners, though it was patently false); more exposure to political concerns and the eventual public offering, which may or may not be a good thing. The last point that seems a bit more negative could actually be a positive. A public offering that goes well will raise a ton of money (likely 200-350 million dollars) and put some more wind in the company s sail. A chunk of change like that would allow a major acquisition or some major research and development money, to further improve the company s holdings. When a company has different well run and well endowed divisions, it creates a synergy which can produce excellent benefits for all the different divisions. An example of this from Freedom Group s perspective is the move to bring Bushmaster under the Remington production umbrella. With the facilities Remington has improved the access to division information and allowed Bushmaster to cut costs on barrel manufacturing, and to put more money into the R&D budgets, giving a wide open road to innovation. Having the ability to purchase other similar companies allows a conglomerate portfolio to maximize these synergies and produce and offer high quality technology driven products and services. Take Barnes Bullets for example: Within weeks of the acquisition, the company released two wildly popular new factory handloads , and has improved the capability of the long range hunting ammunition they

previously produced. This is a result of morale boosts, more research and development, and synergies realized through sister divisions, most likely. Having the ability to control such a large portion of the industry can allow for whole trends to be developed with targeted marketing and lower costs of manufacturing. Perhaps at the tailend of the assault weapon craze, Freedom group is poised to bring about another trend and help more mainstream Americans become gun owners. In a time when more and more non-gun owners are considering guns, and specifically concealed carry guns, Cerberus may have pulled off quite the coup by purchasing Para Ordnance and sending one of its best management executives to run the show there (that s a generalization, the man was already there a few months before the purchase closed, and does not have an overt relationship with Freedom Group, except that after he left FG he went to Para Ordnance, which is now back again under the control of Freedom Group). The short answer to the question posed early on in the text is this: Companies and consolidation like Cerberus/Freedom Group are/have brought about is good for guns, because it gives synergies to the different divisions, adds deep pockets to a industry that could use some more lobbying money and adds marketability to brands that aren t exactly mainstream anymore.