CalSTRS

Why Cerberus still hasn't sold its gun giant

December 9, 2013: 12:08 PM ET

It has been nearly one year since Cerberus pledged to sell Freedom Group, in the aftermath of the Newtown killings. So why does it still own America's largest gun maker?

A protest held earlier today outside of Cerberus Capital Management's New York headquarters.

A protest held earlier today outside of Cerberus Capital Management's New York headquarters.

FORTUNE -- It has been nearly one year since the Sandy Hook massacre, which also means it's been nearly a year since private equity firm Cerberus Capital Management pledged to sell Freedom Group, a firearms and ammo company whose products include the Bushmaster AR-15 rifle used to kill 26 elementary school students and staff on that tragic day. The promise came in response to pressure from Cerberus investors like the California State Teachers Retirement System (CalSTRS), with investment bank Lazard (LAZ) hired to find a buyer. But, to date, Cerberus and its investors still own Freedom Group.

Late last night came news (first reported by The Financial Times) that Cerberus this week plans to offer LPs a voluntary way out of Freedom Group, via a third-party minority investment and new debt facility. Not hearing too many additional details yet, except that the new investment will come from an institutional money manager (i.e., not a family office) and that BoA Merrill Lynch (BAC) is organizing the creditor call.

It also is unclear if Cerberus will try to segregate management fees paid by investors who exit Freedom Group, so that they no longer are indirectly paying to oversee and manage the asset.

In the meantime, and obvious question: Why hasn't Cerberus sold Freedom Group yet? Not surprisingly, it is a complicated answer. Here are five major factors:

1. It's too big.

Cerberus created the single largest gun manufacturer in America, thus making it too expensive for smaller makers – like Smith & Wesson (SWHC) or Sturm Ruger (RGR) – to buy in its entirety (same . Smith & Wesson, for example, has a market cap just barely above Freedom Group's debt, let alone its equity value. Ammo maker Alliant Techsystems Inc. (ATK) is large enough, but its gunmaker acquisitions have mostly been for smaller, niche players. Foreign interest is said to have been muted by possible regulatory objections (particularly given all of Freedom Group's military and homeland security contracts).

2. It's too controversial.

The absence of strategic buyer would typically leave private equity interest, except that the limited universe of firms that can buy such a large asset is the same universe that raises money from public pensions like CalSTRS. In other words, they can't buy for the same reason Cerberus needs to sell. Many of those investors also are large shareholders in investment banks and other lenders, thus making it difficult to find groups to underwrite a leveraged buyout.

3. It's too expensive

Cerberus has effectively returned its principal on Freedom Group via dividend recaps, so the sale question was largely about level of profit. And, in short, Cerberus wanted a lot of it. The firm told prospective buyers that it was looking at multiples of late 2012/early 2013 sales (i.e., post-Obama reelection and post-Sandy Hook, when gun sales and profits went through the roof), rather than of 2011 or early 2012 sales (when business was softer, after a brief boom that followed President Obama's original election). Freedom's EBITDA basically doubled during that time period, and few buyers wanted in at the market top – particularly given the sector's known volatility.

4. It's too integrated

One theory early on was that someone like Smith & Wesson would try to buy one or two pieces of Freedom Group, such as Remington. One problem with that, however, is that Freedom is manufacturing multiple lines out of many the same factories. So to pull out one line would be logistically difficult.

5. Cerberus boss loves the business

When Cerberus decided to sell, it was noted that firm founder Steven Feinberg's father lives in Newtown. Discussed less is that Feinberg is a known gun enthusiast who really loves the business. That's why he proposed buying the company himself over the summer, although such a deal would have been fraught with way too many allegations of self-dealing.

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