Brazilian gunmaker Forjas Taurus SA is emerging as a likely bidder for Freedom Group Inc. as analysts bet that proposed U.S. gun controls will fail to deter demand in the world’s largest consumer firearms market.
Taurus, the acquirer of U.S. revolver maker Heritage Manufacturing Inc. last year, would be a good suitor for all or part of Freedom Group, according to brokerage Coinvalores and Wedbush Morgan Securities. Taurus, which said in November that it’s “analyzing acquisition opportunities” for 2013, declined to comment on speculation of a bid.
Buying Freedom from Cerberus Capital Management LP has risks after President Barack Obama proposed broad gun-control measures yesterday in the wake of an elementary-school shooting spree. While Cerberus is said to be willing to sell at a discount, Obama’s proposed ban on assault weapons and high-capacity magazines may curb sales at money-losing Freedom.
“Despite recent tragedies, they still look to the U.S. market with a lot of optimism,” Bruno Piagentini Caloni, an analyst at Sao Paulo-based Coinvalores, said in a telephone interview. “One of its growth strategies is through the acquisitions of small companies that already have a traditional presence in North America.”
The market value of the world’s top six publicly traded gunmakers plunged by $215 million in the week after the Dec. 14 school shooting that killed 20 elementary-school students and six adult staff members.
The gunman, 20-year-old Adam Lanza, had previously shot his mother to death at their nearby home. He committed suicide at the school.
Freedom Group, which made the semi-automatic rifle used in the shooting, posted a loss in the year through Sept. 30, as well as in 2011 and 2010.
Peter Duda, a spokesman for Cerberus at Weber Shandwick, a public relations firm, did not respond to an e-mailed request for comment.
The firm said in a December statement that the sale “allows us to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate” on gun control.
Taurus, the world’s second-largest gunmaker by revenue, has gained 66 percent in the past year, outpacing a 2.4 percent increase for Brazil’s benchmark Bovespa index. Smith & Wesson Holding Corp., the largest gunmaker by revenue, rose 92 percent, while No. 3 maker Sturm Ruger & Co. advanced 33 percent.
In Sao Paulo today, Taurus was unchanged at 2.72 reais at 1:11 p.m.
Taurus, based in Porto Alegre, Brazil, trades at discounts of 35 percent and 41 percent to Smith & Wesson and Sturm Ruger, respectively.
With 270 million legal weapons in circulation in the U.S., the acquisition opportunity would be lucrative, Piagentini said. The U.S. generated 55 percent of Taurus’s net income of 505 million reais ($248 million) in the first nine months of last year.
“On the consumer market size, it’s almost the size of all the markets of the world combined,” said Rommel Dionisio, an analyst at Wedbush Morgan Securities in New York.
Instant background checks for U.S. gun sales surged 24 percent in November, when Obama was re-elected, from the previous month amid speculation he may seek harsher restrictions.
The number of checks, used as a gauge of gun purchases, was 39 percent higher in December than the previous month and about 50 percent higher than a year earlier, according to data from the U.S. Federal Bureau of Investigation.
Sales at Madison, North Carolina-based Freedom in the first nine months of 2012 rose 20 percent to $677.3 million.
Forjas Taurus posted about $265 million in revenue in the same period. It has six factories in Brazil as well as one in Miami and currently controls 19 percent of the U.S. market, Piagentini said. Dionisio places the company among the top 10 handgun manufacturers worldwide.
Taurus, which has a market value of 387.9 million reais ($190 million), is more likely to bid for a piece of Freedom Group or find a partner to help with the purchase because the target company is significantly larger in terms of revenue, Piagentini said.
“Remington is a larger company than Taurus is but certainly they are motivated sellers,” Dionisio said.
Cerberus expected to sell at a discount because it couldn’t wait on the best deal with U.S. lawmakers debating gun control, a person familiar with the firm said when the decision was announced in December.
A Forjas Taurus spokesman, Vander Correa, declined to comment.
Freedom Group may fetch $745.7 million to $1.13 billion in a sale, based on the ratios of enterprise value to Ebitda, or earnings before interest, taxes depreciation and amortization, of publicly traded competitors such as Smith & Wesson and Sturm Ruger, data compiled by Bloomberg show.
Cerberus announced its plans to sell Freedom Group in December, hours after California Treasurer Bill Lockyer said he would propose that the state’s public pension funds, the two largest in the U.S., divest investments in firearm manufacturers that make guns prohibited under state law.
Tobacco and Oil
Like tobacco and oil companies, Freedom Group won’t have a hard time finding buyers, said Charles Elson, director at the University of Delaware’s John L. Weinberg Center for Corporate Governance.
“The classic nature of investing is finding something out of favor and buying it,” Elson said in a telephone interview from a Philadelphia airport. “It’s risky, but it pays off.”