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Monday, December 9, 2013

Cerberus to Buy Back Freedom Group Equity from Pouty Investors

Since, the Newtown tragedy, Remington Outdoor Inc. and its subsidiaries known as Freedom Group Inc. has recorded a Net Income of $89.5 Million. Comparing to the same 9 months in 2012, Net Income has multiplied 16 times over from the $5.6 million earned last year. An evem more outstanding figure is the massive decrease in the Stockholder Deficit (Book Value with intangible assets) from -$117.9 Million to -$27.9 Million. At this same rate, Freedom Group will start booking a positive Net Asset Value by the end of this year. In other words, on paper they will be seen as an extremely viable company with plenty of upside given the big name Brands in their portfolio. 

We mainly point out these figures help illustrate why Freedom Group's parent company Cerberus may be second guessing their knee jerk reaction sell off of their firearms and ammunition holdings. After the Newtown tragedy the private investment firm reported that they would divest their Freedom Group holdings to appease investors whom feel they should not be investing in guns. An emotional response such as this is certainly not one that makes proper financial sense. However, it appears time has changed the three headed dog's tune when it comes to their firearms holdings. 

Cerberus Capital Management has listed $20 Billion in assets under management, making Freedom Group only around 5% of its holdings. One could venture to say that this is a small annoyance given the hot button issues that come with "the gun issue, however these are smart investors that are certainly not going to leave money on the table if they can help it. It has been widely reported that Cerberus was looking to sell off the company for around $1 Billion along with a credit package of $200 million given the company's relatively large liabilities. Given their recent rise in earnings the latter can prove to no longer be an issue. Ruger is currently showing a market cap around $1.4 Billion, which is up 75% what it was just after the Newtown tragedy when antsy investors sold off in huge volume. 

Reuters has reported today that Cerberus is making the move to allow current investors to exit their Freedom Group Investment by purchasing their equity utilizing a new credit package they have put together from an undisclosed financial institution.  While, this will increase their overall liabilities, it will allow the company to provide an option to pouty investors whom no longer want take part in any recent gains from their firearms investments. 

After years of recording losses it is quite easy for a private investment firm like Cerberus to not think twice about shuttering a holding like Freedom Group when politics come into play. However, now that they see their firearms and ammunitions manufacturers as a viable investment product, they are certainly thinking twice about selling it off without leaving any money on the table. It is not a far fetched assumption that someone would have already snatched up Freedom Group given the low asking price from the outset. 

Sure their is possible downside given the companies large liabilities, however a large industry entity with the proper management could take the huge Brands for which Freedom Group is known and further leverage their product mix to bigger sales and more importantly large profits. Why Cerberus continues to hold on to their hot potato is a much bigger question than why no one has purchased it. We would rather see the company go public and bring on management that knows how to properly utilize the synergy of their brands to introduce more innovating products. The gun grabbers will fall by the wayside as reason prevails.

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