Misfires Aplenty at Cerberus' Gun Unit

Cerberus Capital Management has sent in reinforcements to shore up its munitions company, Freedom Group. Yet that hasn't stopped the discouraging news from the Madison (N.C.)-based gun and ammunition manufacturer.

Since 2006, Cerberus, a New York-based buyout firm with assets valued at about $23 billion, has scooped up 13 firearm and ammo brands. These include well-known names such as Remington, Marlin, Bushmaster, DPMS/Panther Arms, and Barnes Bullets. Cerberus has combined these investments into Freedom Group. The company enjoyed a booming 2009 with sales of $848.7 million, making it the country's largest civilian arms maker.

A year ago, Cerberus filed with the Securities and Exchange Commission to take Freedom Group public. The gun play looked like it would pay off nicely. Since then, however, Freedom has suffered setbacks. The gun market slowed in 2010, and the initial public offering so far has not happened. In September, Freedom's chief executive officer, Theodore Torbeck, resigned abruptly without the company naming a permanent replacement.

Cerberus announced that Robert L. Nardelli, former CEO of Chrysler and Home Depot (HD), would head Freedom Group while the arms maker searched for a long-term chief. Nardelli, 62, had run Chrysler for Cerberus until 2009, when the carmaker filed for bankruptcy after one of the worst sales slumps in decades. He was ousted as CEO of Atlanta-based Home Depot in 2007 amid criticism of the company's lagging performance and his compensation.

In October, Freedom Group took two more public-relations hits. Bushmaster announced on Oct. 15 that it was voluntarily recalling its Adaptive Combat Rifle (ACR) because of a flaw that can turn the semiautomatic gun into a fully automatic that fires continuously when the trigger is pulled. "The unexpected firing of multiple rounds creates a potentially dangerous situation," the recall notice stated.

An outside spokesman for Freedom Group, Michael Fox, says the company isn't releasing the number of rifles affected. Freedom "will revisit the exact timing of the IPO following the naming of the new CEO," he adds. A Cerberus executive, who requested anonymity, says Freedom "has been hitting singles and doubles when we're looking for grand slams. That's why we sent in Bob Nardelli. That's what he does."

Introduced in January, the ACR is a military-style rifle intended for civilian and police customers. Bushmaster has been advertising the gun prominently on its website, calling it "the only rifle you need to master the infinite number of extreme scenarios you'll face in the worlds of law enforcement and personal defense." The basic version of the ACR comes with a 30-round ammunition magazine, a muzzle-flash suppressor, and a manufacturer's recommended retail price of $2,685.

Meanwhile, CNBC in October aired an hour-long documentary, Remington Under Fire, that focused on long-standing allegations that the popular Remington Model 700 rifle for hunters and snipers has an unsafe trigger that can cause accidental discharges—accusations Remington has denied for years.

So far this year, according to a Sept. 17 filing with the SEC, Freedom Group has paid Cerberus fees totaling $1.1 million "for consulting services provided in connection with improving operations."

The bottom line: Cerberus investments in firearm and ammo brands have been hit by a tough economy, negative press, and a combat rifle recall.

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