Wednesday, March 12, 2014

GDSI Looking to Mass Consolidation with Freedom Group and Others

It seems quite interesting that a company like Global Digital Solutions Inc. (GDSI) with a market cap of just $73 million is looking to purchase Freedom Group from Cerberus for $1.08 Billion. Take note that this is not a done deal yet and GDSI points out that they have not received a response to the offer. Furthermore, they have been turned down on a previous offer. The value of Freedom Group is definitely up for debate given the recent volatility, but the industry is showing a lot of upside as of late with many different new customer potential opening up. As for the offer, you can see the breakdown below. Clearly they have a lot of cash backing from some entity or entities. They will be dishing out $750 Million in Cash and interestingly their offer includes 160 Million Shares of Common Stock, which would technically keep Cerberus in the gun game. 

The Company submitted a non-binding proposal, dated January 27, 2014, for the acquisition of the Remington Outdoor Company, Inc., also known as Freedom Group, Inc. ("Freedom"). The Company received no response to such proposal and, by its terms, it expired on February 17, 2014. In order to facilitate discussions, the Company has revised its proposal by leaving certain basic terms open for future negotiations and submitted a revised non-binding proposal, dated March 10, 2014. Under the proposal, the Company would offer consideration valued at eight times the 2013 consolidated EBITDA of Freedom and its specified subsidiaries less long term indebtedness. The Company estimates such EBITDA at $237.5 million and such long- term indebtedness at $818 million, which would result in total consideration of $1,082 million. Such amount would be subject to determination and adjustment as described in the proposal. Freedom has estimated that its net sales for 2013 will be in the range of $1,250.0 million to $1,275.0 million and that its adjusted EBITDA will be in the range of $235.0 million to $240.0 million.

On top of the Freedom Group buyout they are also looking to purchase a major manufacturer of law enforcement and military equipment for $15.6 million. This manufacturer has been designated as private company 1 (PC1) and has last year sales of $30 Million with $2.6 Million in Earning before interest, tax, depreciation, and amortization. In addition they are looking to purchase another private company (PC2) for $30 Million, which also operates in the military and aerospace industry with product technology and development services. Plans were also previously in the works to merge with Airtronic USA, a firearms manufacturer, but those are still in being worked out through reorganization as Airtronic USA goes through bankruptcy court to finalize the details. 

We don't think GDSI will be giving ATK a run for its money any time soon, but it is interesting to see their aspirations and the potential further mergers to come. They point out their grand aspirations on the company website along with the interesting graphic show:

"An earthquake of failed capital has shaken America’s mainstream gun manufacturers leaving few resources to bring their product lines into the 21st century.  Consolidation is expected to continue in both manufacturing and distribution and GDSI is determined to take a key leadership role in resolving long-standing debt, upgrading plant and equipment and streamlining the flow of armaments from manufacturer to point of use."

Global Digital Solutions Inc. does have some interesting gun security technology, but the extent of its capabilities is hidden behind patent pending curtains, so it is hard to say how much that plays into this acquisition, although they do tout their capabilities in leveraging their technology to help revolutionize the small arms industry.In the meantime Cerberus is looking to buy Safeway and its affiliated grocery store chains for $9 Billion, so in the scheme of things Freedom Group may just be a drop in the bucket with some potential problems given the "hot button" gun issue. They may just want some extra cash to help lube other transactions. They already said they wanted to get rid of Freedom Group, but clearly the right dollar amount hasn't sprung up yet and the market is hot as they clearly saw in their previous financial statements. 

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