Stephen Feinberg, Cerberus Capital Founder, Exploring Bid For Bushmaster Gunmaker

Cerberus Founder Exploring Bid For Bushmaster Gunmaker

(Adds details on the process)

By Olivia Oran, Greg Roumeliotis and Martinne Geller

April 17 (Reuters) - Private equity mogul Stephen Feinberg may bid for the Bushmaster rifle maker that his firm Cerberus Capital Management LP put up for sale after one of its guns was used in a Connecticut school shooting, three sources familiar with the situation said.

Feinberg, along with other senior Cerberus partners, is putting together a consortium to make a "stalking horse" offer designed to spur competition for Freedom Group, which makes the Bushmaster rifle, the sources said on Tuesday.

Cerberus is under pressure from the public as well as investors in its funds to sell Freedom Group following the massacre that took place in December in Newtown, Connecticut.

A bid by Feinberg for a company that his own firm owns would be a rare move in the private equity industry. The move raises potential conflict of interest issues, as it could pit the founder's interest against those of the investors in Cerberus funds, known as limited partners. It may also indicate Cerberus may be having problems in selling the company. Banking sources have said that major Wall Street firms have been unwilling to finance a bid for Freedom Group.

Feinberg has approached other wealthy individuals to join him in the bid, the sources said, who declined to be identified because the auction is private. He has not made a bid and may yet decide against it, they said.

Cerberus declined to comment and declined to make Feinberg available for an interview, while representatives of Freedom Group could not be reached for comment.

Freedom Group's AR-15 type Bushmaster rifle was used in the December shootings at Sandy Hook Elementary School in Newtown, which left 20 children and six adults dead.

University of California is among Cerberus investors that have been putting pressure on the private equity firm to quickly sell Freedom Group.

"We do not want to have investments in companies that sell, manufacturer or distribute firearms," spokeswoman Dianne Klein said in an email on Tuesday. The university has a $1 million indirect investment in Bushmaster through a Cerberus private equity fund.

Cerberus' fund investors also include some of the largest U.S. public pension funds. CalSTRS, the California State Teachers' Retirement System, said in December it was reviewing its investment with Cerberus in the wake of the shooting. CalSTRS could not immediately be reached for comment.

Soon after the shootings, Cerberus said it would look for a buyer and hired investment bank Lazard Ltd to help sell the business.

Lazard declined to comment.

The stocks of publicly traded gunmakers such as Smith & Wesson Holding Corp and Sturm Ruger & Co, which fell after the shooting, have since recovered.

Proposed gun control legislation in U.S. Congress since the shootings has made only modest progress and has been heavily watered down.

CONFLICT OF INTEREST

One of the sources familiar with the auction said Cerberus is planning to prevent conflicts of interests through measures including setting up an independent committee of Freedom Group's board of directors as well as a special shareholders committee.

Under the plan, the independent board committee would include former generals and industry experts, while the shareholders committee would include investors in Cerberus' funds whose capital was committed for the Freedom Group investment, the source said.

These two committees would then negotiate with Feinberg's consortium and decide on the eventual sale, the source said.

Cerberus has also designed other measures to make sure the auction is fair if Feinberg decides to bid, the source said. If another buyer bids 10 percent or more above the stalking horse bid, Feinberg would be forced to drop out of the auction, the source said.

There also would not be any break-up fee or other expenses paid by the company if Feinberg's bid is topped by another party, the source added.

Feinberg and other senior Cerberus partners plan to invest their own money as well as roll over any existing stakes in the company to fund the bid, the source said.

Under the bid being contemplated, Feinberg plans to be a minority investor, but he and his Cerberus partners could end up controlling the company, the source added.

Cerberus bought firearms maker Bushmaster in 2006 and later merged it with other gun companies to create Freedom Group. The company's sales rose about 20 percent to $931.9 million in 2012.

Feinberg worked at investment banks Drexel Burnham Lambert and Gruntal & Co before co-founding Cerberus in 1992 along with William Richter. Cerberus has more than $20 billion under management.

Feinberg's father, Martin Feinberg, is a resident of Newtown, public records showed last year. (Additional reporting by Peter Henderson in San Francisco; Editing by Soyoung Kim, Paritosh Bansal, Chris Gallagher and Ryan Woo)

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