Sunday, December 16, 2012

Who's the Target Now?

If you are not a gun aficionado, maybe you did not know the difference between a Bushmaster and a bush leaguer.  Until last Friday, that is.  Now you know.  A .223-caliber Bushmaster semi-automatic rifle (a civilian version of the military M-16) was used by a single attacker to mow down 20 first-graders and 6 faculty at Sandy Hook Elementary School in Newtown, CT.  It took less than ten minutes for the gunman to discharge 100 rounds.

This attack came ten years after the infamous D.C. snipers randomly targeted 13 victims at long range, killing ten (Washington Post retrospective here).  The weapon of their choice:  a Bushmaster .223.  Relatives of the victims eventually sued the manufacturer, Bushmaster Firearms International, LLC, as well as a gun shop, Bull's Eye Shooter Supply.  The gun used in the Beltway shootings was actually stolen from Bull's Eye, but that did not relieve the dealer of responsibility.  Plaintiffs argued that Bull's Eye was negligent in failing to control its inventory and furthermore that Bushmaster was negligent not for making the gun, but for distributing it to a dealer with a long history of stolen inventory.  Bull's Eye settled for $2 million in September 2004.  Bushmaster chipped in another 500 grand.

At the time Bushmaster was headquartered in Windham, Maine.  The company was manufacturing guns both there and at a second facility in Nevada and was doing about $65 million in annual sales.  The Windham plant had 95 employees.  In April 2006 Bushmaster was sold to Freedom Group, Inc., a gunmaker roll-up itself owned by Cerberus Capital Management.

River Valley citizens will recognize that last name.  Cerberus is the private equity firm that bought Rumford's coated-paper mill and several other sister mills from MeadWestvaco in 2005.  The new papermaking entity, NewPage, funded the acquisition with high-coupon debt.   Even after mill closures and workforce reductions, NewPage was forced to seek bankruptcy protection from creditors in 2011.  That was the same year that the Bushmaster plant in Windham was shuttered, eliminating the remaining 73 jobs there.  Anyone see a pattern here?

But I digress.  We were talking about GUNS and AMMO!  Question is, will Bushmaster be on the hook for damages from the Sandy Hook slaughter?  There might be some clever lawyers out there who think yes.  In its latest financial disclosure, Freedom Group included the following advisory to investors:

"As a manufacturer of firearms, we were previously named as a defendant in certain lawsuits brought by municipalities or organizations challenging manufacturers‘ distribution practices and alleging that the defendants have also failed to include a variety of safety devices in their firearms. Our insurance primarily excludes coverage regarding such claims. In the event that additional such lawsuits were filed, or if certain legal theories advanced by plaintiffs were to be generally accepted by the courts, our financial condition and results of operations could be adversely affected."

There is also regulatory risk, should lawmakers decide to tighten restrictions on the sale and distribution of certain kinds of firearms.  And if that is not enough risk, how about this:  13% of Freedom's sales are made through Wal-Mart.  There is no long-term contract governing this merchant relationship.  If Wal-Mart determines that continuing to push guns might invite a public-relations nightmare, the retailing giant could cut off Freedom just.  Like.  That.

Freedom is ill prepared for the blowback.  It has reserved less than $20 million for product-liability litigation and is saddled with over $650 million in debt, which about matches the company's total sales for the first nine months of 2012.  Perhaps to throw off the lawyers, Freedom has just changed its name to Remington Outdoor Company, Inc.  But it can't hide.  If Congress does not address the gun market soon, the courts will.

Click here to buy.

[update, 12-18-12--]

Under pressure, Cerberus is dumping its stake in Freedom Group.  Story here.

Dick's Sporting Goods has suspended sales of all rifles at its 500+ stores nationwide (company website here).  Wal-Mart pulled a Bushmaster model from its web store yesterday.

A spokesman for MetLife says that the N.Y.-based insurer has "no material exposure to gun manufacturers," which means that the firm's investors can stop sweating bullets.

The Massachusetts state pension fund is considering scrubbing its portfolio of gun manufacturers.

ZeroHedge passes along this chart from Smith & Wesson's latest pitch to investors:

[click here to enlarge]

People talk about gun control...
for the other guy.

And here's what Smith & Wesson's share price has done recently:

Off 30% in eight trading sessions!

[update, 01-24-13--]

Two major banks are urged to pull their credit lines to gun manufacturers as pension funds divest.  Story here.

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