Explaining Southern California's economy

Newtown anniversary: Rifle maker at center of disinvestment campaign

Bushmaster rifle

Michelle McLoughlin /Reuters /Landov

Bushmaster rifle made by Bushmaster Firearms.

Days after Adam Lanza shot and killed 20 students and six educators at Sandy Hook Elementary School, the company that made his rifle went on the auction block.  One year later, the Freedom Group still hasn't sold.

The company, owned by private equity fund manager Cerberus Capital Management, includes Remington Arms (the country’s oldest gun maker), Marlin Firearms, and Bushmaster Firearms, which made the rifle Adam Lanza used.

Freedom Group is the largest producer of firearms in the U.S. — leading a $4 billion consumer market in shotguns, bolt-action and traditional rifles, according to Rommel Dionisio, Senior Vice President for Equity Research at Wedbush Securities. But its size and the political climate created by the shootings at Sandy Hook in Newtown, Conn., have made it a tough sell. 

"Ever since the Newtown shootings, there’s certainly been a wave of backlash in the investment communities for certain pension funds, endowment funds to divest their holdings in anyone having anything to do with the firearms industry," Dionosio said.  "Also, perhaps some large commercial banks might be hesitant to lend to somebody who needs to borrow money to acquire the Freedom Group."

One of the main pension funds that wants to cut ties completely with the firearms industry is the California State Teachers Retirement System (CALSTRS). It made that decision in the days after the Sandy Hook shooting, and by April, had divested about $3 million in public equities and holdings with gunmakers Smith and Wesson and Sturm, Ruger & Co.  But through an investment with Cerberus, CALSTRS still holds a small stake in Freedom Group: between 2 and 3 percent.

"CALSTRS is really deeply disappointed that Cerberus Capital Management has not yet sold Freedom Group, despite their good faith efforts," said CALSTRS spokesman Mike Sicilia. "In our view, Cerberus has been working very hard to find a solution, and to allow investors like CALSTRS a way to exit the investment in Freedom Group." 

After months of struggling to sell Freedom Group for more than $1 billion, Cerberus has shifted its focus to creating an exit strategy for investors  like CALSTRS to sell their interests in the firearms maker, as the New York Times explains:

The proposal outlined on Monday, in which a new investor would take a minority stake and provide $200 million in new debt, would be only an interim step in Cerberus’s efforts, people briefed on the matter insist. The firm may still pursue a sale, an initial public offering or some other transaction afterward — or instead of — the recapitalization.

CALSTRS spokesman Mike Sicilia confirms that CALSTRS and Cerberus have had several meetings recently to discuss options for Freedom Group.  In a statement on its efforts, Cerberus said: 

We remain committed to divesting our holdings in the company in an efficient and responsible manner and are actively pursuing a number of alternatives that would allow our investors the opportunity to exit their investment as expeditiously as possible.  We cannot comprehend the losses suffered by the families and friends of those killed by the unthinkable crimes committed that day.  No words or actions can lessen the enormity of this event or ease the pain that was inflicted on so many.

Larry Harris, professor of  finance at the USC Marshall School of Business said while Cerberus wants to sell the company, it remains determined to get the right price. He points out that earnings have been strong at Freedom Group, as sales increased  substantially because many people thought that firearms would be further regulated in the aftermath of the Newtown shootings.  But selling guns and selling a company that makes guns are different. 

"The company looks good from a financial point of view, but for people who are concerned about the ethics of owning a manufacturer of devices that are designed to kill things and people or animals, it’s very uncomfortable," said Harris, who served two years as Chief Economist for the U.S. Securities and Exchange Commission. He adds that the investors who leave ownership of controversial but lucrative companies like gun, cigarette, and alcohol manufacturers have no effect on the future of the industries.

"They don’t change in the slightest the behavior of the industries, the people working in them, or the production of the offensive items," said Harris.  "But what they do is they clear up their own conscience.”

By clearing up their own conscience, Harris said, they also clear the way for investors without ethical concerns about the industries in which to invest. 

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