Cerberus, the private equity fund that nearly ruined itself by making bad bets in Detroit, particularly on Chrysler, is considering taking its gun company interests public. According to The Wall Street Journal (subscription required), the firm "is in advanced preparations for an initial public offering of Freedom Group Inc." The company has about $900 million in sales.
The move may be a profitable one for Cerberus. Gun company Smith & Wesson (NASDAQ: SWHC) trades at just above $5, near the high end of its 52-week range. That gives the company a market cap of $300 million on sales of about $345 million. On a ratio-and-proportion basis, that would make Freedom worth close to $800 million.
Cerberus may be heading back to basics. The car industry was a high-profile business for the fund to invest in, putting its name in business sections of papers and on financial TV programs around the world. As those investments went bust, Cerberus was faced with clients who wanted to take their money out of its funds. The private equity firm's reputation as an intelligent investor was badly damaged.
The gun industry appears to be a much more steady money-maker than the auto business. Last quarter Smith & Wesson made an operating profit of $17 million on revenue of $102 million, an impressive margin. The company has $35 million in cash and modest long-term debt of $83 million.
There are probably as many guns in the U.S. are there are cars. Gun sales to law enforcement and military interests are always going to offer a steady flow of sales.
Cerberus will probably be able to do with guns what it could not do with its auto interests -- make money.
Douglas A. McIntyre is an editor at 24/7 Wall St.
