Gunmaker Sale Needs a Background CheckWilliam D. Cohan
April 22 (Bloomberg) -- What with the terrorist attack in Boston, the deadly explosion at a fertilizer plant in Texas and the inane vote against gun control in the U.S. Senate, you may have missed the news late last week about Stephen Feinberg. The reclusive co-founder of the buyout firm Cerberus Capital Management LP is attempting one of his most daring and ill-conceived deals of all time: trying to buy Freedom Group Inc., one of the world’s largest gun manufacturers, from his own company.
Yes, that’s the same gun maker that Cerberus said it would sell in the wake of the Dec. 14 massacre at Sandy Hook Elementary School in Newtown, Connecticut -- an announcement that got Cerberus a lot of positive publicity.
Have you no shame, Mr. Feinberg? Forget for the moment that one of Freedom Group’s Bushmaster rifles was used in the rampage that killed 20 innocent schoolchildren and six adult staff members. And forget that your father, Martin, lives in Newtown. You cannot possibly believe that any bid that you and your group of investors concoct for Freedom Group could ever be deemed fair to the other investors in the company who are not also trying to buy it. (Cerberus owns the vast majority of Freedom Group; Feinberg controls Cerberus.)
No matter what measures the board of directors of Freedom Group adopt to legitimize a bid from Feinberg -–- setting up a special committee of outside people to evaluate it, or using it as merely a “stalking horse” to bring other bidders to the table (both of which have been suggested) –-- there will be no avoiding the perception among the minority shareholders of the company and the investors in Cerberus that Feinberg is trying to steal it in a non-arms-length transaction.
This is simply an unacceptable turn of events, and is probably indicative of what Feinberg should have known all along: As one headline-grabbing random massacre follows another, it’s not easy to sell a company that manufactures products that kill human beings.
It was a poor decision by Feinberg -- a big-game hunter and former Army sharpshooter -- to buy the various companies that constitute Freedom Group in the first place. He is only compounding his difficulties by trying to purchase the company back from his other investors now that it looks like the auction to sell Freedom Group isn’t going well.
It’s one thing, say, for Michael Dell to try to take private his public company, Dell Inc., along with other private-equity investors; it’s quite another thing for Feinberg to try to buy out his Cerberus investors. In the former, there are many safeguards to prevent Michael Dell from buying the company on the cheap (although at least one large Dell shareholder, Southeastern Asset Management, is claiming otherwise). Michael Dell has agreed not to vote his millions of shares -- meaning that most of the minority shareholders will have to approve it - - and also to roll them into the equity of the new company that is buying his old one at a modest discount to what other shareholders would get. And a special committee of the Dell board of directors asked Evercore Partners Inc., the investment-banking boutique, to try to find a higher offer than what Dell has proposed.
Anything can be negotiated, of course. So it’s quite possible that Freedom Group will put in place a special committee to consider Feinberg’s bid and other safeguards. It is also possible that the other, non-Feinberg investors in Freedom Group and Cerberus might prefer his cash –-- $1 billion seems to be the number floating around, though that seems high based on about $120 million in earnings before interest, taxes, depreciation and amortization -- to a failed auction in which they continue to own the company and get stuck with an illiquid, unsalable investment. The California State Teachers’ Retirement System, which had a $750 million investment in Cerberus at the end of September 2012, said on April 17 that it hadn’t seen the details of Feinberg’s proposal but was keeping an open mind.
The whole thing stinks. Feinberg has an unresolvable conflict of interest, no matter what he says or what the Freedom Group board concocts to paper it over. He should withdraw his offer, and Lazard Ltd. -- which has been hired facilitate a sale -- should redouble its efforts to find an independent third-party buyer for whatever price can be fetched. If that price is deemed too low by existing shareholders, then there is also my preferred option: melting down the company’s $200 million inventory of weapons, and constructing monuments to the horror of gun violence in places such as Newtown; Aurora, Colorado; Blacksburg, Virginia; and, come to think of it, on the floor of the U.S. Senate.
(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. The opinions expressed are his own.)
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