Cerberus and the Business of Firearms

[seamusTX]

Anyone else find it interesting that the company is named for the three headed dog guarding the entrance to Hades?

Yeah, but I don't know what to make of it.

- Jim

[Skiprr]

BobCat is right: Time to lighten it up just a little...



"The only rifle you'll ever need."

Sorry. I just couldn't resist. I have no self-control. (That's half a Marlin 1895 .45-70, and half a Cobb AR-15 in .338 Lapua. )

Feinberg supposedly chose the name Cerberus as the company's name because he "liked the idea that one of the dog's heads was always on watch, just as his firm would guard its clients' investments around the clock" (this from J. Ezra Merkin, a partner at hedge firm Gabriel Capital, who's partnered with Cerberus on some deals).

But ya gotta love the description in Wikipedia:

In Greek mythology, Cerberus or Kerberos (Greek ΚέÏ?βεÏ?ος, Kerberos, "demon of the pit") was the hound of Hades, a monstrous three-headed dog with a snake for a tail (sometimes said to have 50 or 100 heads) called a hellhound... Cerberus guarded the gate to Hades and ensured that spirits of the dead could enter, but none could exit... In Dante's Inferno, he is described as having a human head. This symbolizes the possibility of Cerberus being more human than animal.

On yet another brighter note, Cerberus's Feinberg is evidently a hunter, mainly of partridges and pheasants on land he has in upstate New York, but he's also gone after elk in Colorado.

We won't mention that he was a political science major at Princeton, where his senior thesis was a way-left argument that drugs and prostitution should be legalized. But that was in the early '80s (amazing how young the captains of industry have become as I grow older ), and today he contributes a lot of money--he can afford it--to Republican political causes.

[seamusTX]

On yet another brighter note, Cerberus's Feinberg is evidently a hunter, mainly of partridges and pheasants on land he has in upstate New York, but he's also gone after elk in Colorado.

That's a good start, but a lot of those guys with $5,000 Italian shotguns and canned hunts are entirely in favor of gun control for the lower classes.

- Jim

[BobCat]

Skiprr said, in part, "...a political science major at Princeton, where his senior thesis was a way-left argument that drugs and prostitution should be legalized."

Cool! Rather than left-wing, I'd characterize that position as libertarian or laissez-faire capitalist - let the market decide, don't let moral judgments dictate policy. Note that I am personally not promoting drug use or prostitution, just saying that his position sounds less totalitarian and more libertarian than the phrase "left-wing" suggests, these days.

Oh! - and the Marlin 1985 / .338 Lapua black rifle is great! I want one of those, too!

Regards,
Andrew

[Skiprr]

Another long post. Sorry. That's what happens when I ain't workin' 15 hours a day and have time to get my teeth into something else...

That's a good start, but a lot of those guys with $5,000 Italian shotguns and canned hunts are entirely in favor of gun control for the lower classes.

Yeah, but I was reminded of the cynical-future flavor of my earlier posts, so I was lookin' for something positive to say.

And when Kevin wrote: "If you dare question the Halliburton/KBR exclusive contracts, you're un-American!" I thought I showed great restraint by not resorting to apophasis (I just threw that word in for Jim's benefit ) and responding, "Funny you bring that up in this thread; I won't mention that Cerberus bought IAP Worldwide Services (http://www.iapws.com/) in May 2004, a service company led until recently by CEO Al Neffgen (previously KBR's COO of government and infrastructure for the Americas; Neffgen was recently replaced by Dave Myers); president Dave Swindle (previously KBR's VP of business acquisition and national security programs); and Chuck Dominy, who was for several years Halliburton's chief lobbyist in Washington." (Come on; Jim also appreciates those semi-run-on Faulkerian sentences. I do this for his sake only. <coughcough>)

And yep, IAP now competes for the very same types of DoD support that Halliburton (who's been doing it via what was Brown & Root--it was the acquisition of Dresser Industries by Halliburton, under Dick Cheney, in 1997 that netted it M.W. Kellogg, and as the companies were smushed together, Kellogg, Brown & Root eventually became KBR--for decades under negotiated, no-bid contracts that never raised an eyebrow because they could provide a service that few could, and that the military could not cost-effectively provide for itself) has become newsworthy thanks primarily to Democrats Dingle and Waxman and their seemingly obsessive, though misdirected, crusade.

Wait. I'll bring this back to firearms. I promise.

What Feinberg has chosen to do with IAP may well be the model that's developing for Remington. Remember I said, "that Cerberus is acquiring Marlin...under the Remington umbrella makes me more optimistic"? Well, when Cerberus got IAP in late spring of 2004, it was reputedly worth about $100 million. Less than 10 months later, IAP's acquisition of Johnson Controls Inc. was announced. The press release was amazingly low key, reading in part: "IAP acquires Johnson Controls World Services, an international leader in facility management operations, contingency support, and technical services, and its wholly-owned subsidiary, Readiness Management Support. The acquisition significantly diversifies IAP's business mix and customer base."

I say amazingly low key because JCI was much larger than IAP...but IAP had all that money from Cerberus to play with. IAP went, overnight, from a company valued at $100 million to one worth $1 billion!

Seven months later, in October 2006, Cerberus hired John Snow (Secretary of the Treasury 2003-2006 under George W. Bush) to be Cerberus's chairman. Within days, IAP announced it would be one of the companies tendering a bid for the DoD support contracts.

Cerberus played a similar small-becomes-large gambit with SSA Global Technologies, which snatched up eight different companies to quadruple its revenues.

Current perceived relative quality of Remington and Marlin products aside, that Cerberus decided to have Bushmaster be the acquiring entity for DPMS and Cobb, and Remington for Marlin and H&R, may reveal a pattern. If personal firearms for military, LE, and civilian use are of interest to Cerberus--and it sure looks like they are--I would fully expect more acquisitions in the coming months...and probably under those two umbrellas unless, as I mentioned before, they may decide to segregate handguns and end up with three focus areas: tactical weapons, hunting rifles and shotguns, and handguns.

If I had to bet my lunch money, I'd pick Springfield Armory to be next.

Why not Smith & Wesson? They're lookin' awfully ripe for someone with a suitcase full of cash. They've been on a scary rollercoaster since 2004 when they hit $1.41 a share after announcing debt restructuring. They posted rising Q2 profits this year, hit a giddy $21.90 last August, but downgraded estimates last October, which led to a market thumping ever since. Two weeks ago they offered lowered guidance for 2008; that earned 'em a triple analyst downgrade, and shares dropped almost 29% to just over $7.00 (October 26th close was $20.75). Thursday, they closed at $5.88; up a bit to $6.15 Friday (interesting assessment here from The Motley Fool). Closing market cap estimate for S&W was $245 million (I'll betcha it's really a bit less), putting them easily within the whim of Cerberus.

PLUS, ya got the undesirable class-action lawsuit filed December 13 "on behalf of all persons who purchased the common stock of Smith & Wesson Holding Corp...between June 15, 2007 and December 6, 2007." The complaint charges:

...that Smith & Wesson and certain of its officers and directors violated federal securities laws. Specifically, during the Class Period, defendants failed to disclose and misrepresented the following: (i) that the market for various lines of the Company's gun products was saturated with inventory which was causing customers to reduce orders and postpone purchases; and (ii) that the Company's reported sales figures did not represent true growth for the Company's products but rather were simply inventory stocking transactions and as customer inventory levels increased, the Company's sales would suffer.

However--and it may be a big however--Cerberus doesn't have a history of targeting publicly-traded companies. All kinds of SEC complications ensue; it ain't neat, tidy, and quick. Taking it private wouldn't be a financial stretch, but it would take time and approvals. Ruger would be in the same boat. Its share price has gone from a 52-week high of $22.58 to an $8.43 close on Friday. No class-action lawsuits, though. But if you want to buy a privately-held company, you can negotiate that with just a few stakeholders over dinner; a public company is a different matter.

I guess the recent performance of publicly-traded companies in the personal firearms sector is one reason Cerberus's activity over the past several weeks really got my attention. Inventories are up, military orders are down, and consumer spending--no doubt an effect of the mortgage crisis, among other factors--is down.

Springfield Armory is privately held, resurrected from the closure in 1968 by Robert Reese in 1974, whose two sons took it over in the '80s. SA is much smaller than S&W or Remington, or even Marlin. Since it's privately held we can't know for sure, but the street said that it wrapped up its 2005 with 135 employees and revenue of about $6.2 million. Even if their revenues have grown by 100%, a purchase price valuation of, say, $20 to $30 million would be a sneeze for Cerberus. And it would give them a handgun-primary market with the wonderful slogan, "The First Name in American Firearms."

If I were working for Cerberus and thought the personal firearm market would rebound, I think I'd woo Springfield right away--as in yesterday. I'd be wining and dining Colt, too (that's a story in and of itself, but I'd betcha Donald Zilkha could be persuaded by a little cash). If I could get Colt, I might think about making them my tactical arm (and I'd think strongly about keeping William Keys as CEO).

I'd be makin' some trips to Italy, too. Just as I harbor some personal emotion about a faceless mega-hedge-fund buying up Remington and Marlin, I can imagine what would happen if Cerberus struck a deal for Beretta (which owns Benelli, Franchi, SAKO, Stoeger, Uberti, and--guess what?--a 20% stake in Browning Arms). But imagining for a sec that I'm Cerberus, my visa for Italy would be up-to-date, and my passport heavily stamped. We think of Beretta as being one of the world's oldest father-to-son inherited companies, dating back to 1526. But the current owner, Ugo Beretta, is really a Gussalli. Carlo and Giuseppe Beretta had no children, so Carlo formally adopted Ugo, the son of his sister Giuseppina. Ugo's two son's, Pietro and Franco, run the company today. If they were able to remain in control, who knows what deal might be brokered?

I'd watch S&W closely, and at the first hint of bankruptcy (I'm NOT sayin' that's in the cards, just sayin' "What if?"), would be ready to become the White Knight and step in to save the shareholders' investments.


I've received several PMs about this Topic, and to answer publicly: No; I don't know what I'm talking about. This has just been the coincidence of an interest in bidness, the bidness of bidness, firearms, and downtime for the holidays that let me play on the Net and do some research.

But if Mr. Feinberg would like to discuss some very reasonably-priced assistance in this arena, his people may feel free to contact me.

(Edited--I can't believe I'm admitting this--to make one run-on sentence even longer. Not the one you think. The next one. Clear evidence that I just need to step away from the keyboard. Be very glad I am not yet retired: the Moderators would ban me for sheer word count...)

[seamusTX]

... apophasis (I just threw that word in for Jim's benefit...

Actually, if I had ever heard that word, I forgot it. I had to look it up.

Ironically, I practice it all the time. Those few (if any) who read my scribbling closely may observe that silence is an answer.

But if Mr. Feinberg would like to discuss some very reasonably-priced assistance in this arena, his people may feel free to contact me.

It's rare, but people sometimes start relationships based on something posted on an online forum. I once met with the publisher Tim O'Reilly based on a Usenet article that I wrote. (Nothing significant came of it, but it was exciting at the time).

- Jim

[Skiprr]

Since I still casually follow Cerberus's business activities, I thought I'd share part of a recent article from Bloomberg:

Cerberus Agrees to Acquire DynCorp in $1 Billion Deal

Cerberus Capital Management LP, the private-equity firm whose takeover of Chrysler Corp. ended in bankruptcy, agreed to buy defense contractor DynCorp International Inc. for about $1 billion.

Cerberus, run by Steve Feinberg, will pay $17.55 a share, Falls Church, Virginia-based DynCorp said today in a statement. The price is 49 percent more than DynCorp’s closing share price on the New York Stock Exchange on April 9. The deal, expected to close in the third or fourth quarter, is valued at $1.5 billion including the assumption of debt.

DynCorp, which helps train Iraqi police and supports the U.S.’s operation of military bases, is at least the fifth government-services investment that Cerberus has made since 2000, according to data compiled by Bloomberg. Cerberus owns government contractors including IAP Worldwide Services Inc., Tier 1 Group and Radia Holdings Inc.

“Private-equity firms are focusing on defense service providers rather than hardware makers, making a calculation that military demand for services will hold up better than hardware in the years ahead,” Loren Thompson, a defense analyst with the Lexington Institute, a public policy research group in Arlington, Virginia, said in a telephone interview.

...

There have been 68 announced acquisitions of aerospace and defense companies in the past 12 months with an average size of about $261 million including net debt, according to data compiled by Bloomberg. The average premium of 23 deals for which information was available was 68 percent.

The biggest transaction was the $1.65 billion takeover of Northrop Grumman Corp.’s Tasc Inc. consulting unit by a group consisting of General Atlantic LLC and KKR & Co. The world’s second-largest private equity firm, Carlyle Group, was one of the first private-equity firms to invest in aerospace and defense companies in the late 1980s.

[The Annoyed Man]

In your opening post, you said:

So in a scant year, you look at the firearm manufacturing landscape in the U.S. and you can see "Cerberus" stamped in almost every channel except handguns. They have no handgun manufacturing operations yet.

Just by way of interest, I note, as have others in other threads, that Remington is supposed to be coming out with a 1911 pistol this summer, called the "1911 R1."

[Skiprr]

In your opening post, you said:

So in a scant year, you look at the firearm manufacturing landscape in the U.S. and you can see "Cerberus" stamped in almost every channel except handguns. They have no handgun manufacturing operations yet.

Just by way of interest, I note, as have others in other threads, that Remington is supposed to be coming out with a 1911 pistol this summer, called the "1911 R1."

Yep. And I do need to note, in the name of full disclosure, that in the two and a half years since I wrote that first post, Cerberus seems to have done nothing to hinder or drastically alter the firearm businesses that they've bought. In fact, the new Bushmaster ACR (aka Magpul Masada) probably would never have been produced if Cerberus hadn't bought both Bushmaster and Remington. So good on 'em. And maybe that, when they formed a subsidiary to be their firearm manufacturer entity, they named the new company "Freedom Group" says something, too.