In recent months, there has been a lot of talk about what historian Richard Hofstadter called the "the paranoid style in American politics." To believe the Glenn Becks of the world, the Democrats and their Commie, tree-hugging comrades are going to take away Americans' guns, confiscate private property, enslave free thinkers, and generally destroy the nation. Of course, most sophisticates don't give much currency to such arguments. But that hasn't stopped them from trying to monetize the phenomenon. Fox News Channel has boosted audiences by narrowcasting to birthers and tea partiers, and it has seen an increase in ads from gold companies (the metal is thought to be a good hedge against Obama destroying the dollar). HarperCollins, another New York-based component of the Murdoch empire, has ordered up a huge printing of Sarah Palin's memoir Going Rogue. On Tuesday, Peter Lattman, the Wall Street Journal's sharp private equity reporter, unearthed (subscription required) a more interesting example: the pending initial public offering of gun manufacturer Freedom Group.
Ironically, Freedom Group is a creation of Cerberus Capital Management, the private equity firm founded and controlled by Stephen Feinberg, a hard-core Republican. It's been a rough few years for the firm, which bought controlling stakes in Chrysler and GMAC (General Motors' former lending arm) at the top of the market. In the wake of the financial meltdown, Cerberus' stake in Chrysler was wiped out as part of the car company's recapitalization, and its holding in GMAC was trimmed after GMAC was forced to turn to the government for funds. Cerberus didn't get any special dispensation from the Bush or Obama administrations. But now it seems that Obama's election has provided Feinberg with an opportunity to recoup some of his recent losses.
Several years ago, Cerberus set up the Freedom Group as a vehicle to acquire gun and ammunition makers. It owns brands like Remington and Bushmaster. In good times and bad, guns and ammo are pretty good businesses. A diverse set of global customers—law enforcement agencies, the military, hunters, insurgents—provide steady demand. When the economy is good, sportsmen upgrade and purchase new rifles. And when times are bad—and especially when a liberal president gets elected during bad times—the fearful start to stock up. Check out the FBI's data on requests for background checks for gun purchases. (The FBI notes that they "indicate the number of background checks requested," not the number of firearms sold.) In November 2008, the depths of the recession, background checks soared 41.6 percent from November 2007. In December 2008, the total was 24 percent higher than the December 2007 figure. And through the first nine months of 2009, background checks were up about 20 percent from the comparable period in 2008. Obamamaniacs celebrated the election by congregating in Chicago's Grant Park. Some chunk of Obama-phobes celebrated the election by going to Wal-Mart and buying a new rifle.
The Freedom Group is well-positioned to capitalize on the trend. As it notes in the prospectus, filed Wednesday, Freedom Group is "one of the leading firearms, ammunition and related products companies in the world, with #1 commercial market positions across all of our major product categories in the United States, the largest firearms and ammunition market globally." In the 12 months ended June 30, 2009, it sold "1.1 million long guns and 2.0 billion rounds of ammunition."
In a period of slack consumer spending, the Freedom Group's sales are rocking, in part, the prospectus notes, because gun owners freaked out when Obama crushed John McCain at the polls. From Page 55: "Despite the current macroeconomic environment, we have experienced no significant adverse impact in our overall sales. We believe the overall demand for certain of our products has picked up since the change in U.S. Presidential administration and consumers' concerns that the new administration may support more restrictive firearms and ammunition legislation." And from Page 57: "Our industry has experienced a significant increase in certain firearms and ammunition demand since late 2008. We believe a number of consumers have been concerned about increased firearms and ammunition regulations as a result of the new administration in connection with the 2008 Presidential election."
The rising age of tyranny and despotism you hear so much about on Fox News may be bad news for the nation. But for the Freedom Group, it's all good. In a time of pinched consumer spending, margins on both firearms and ammunition have increased over the past year. In the first half of 2009, its sales of firearms and ammunition were up 41.6 percent and 27.1 percent, respectively (although some of that increase was due to acquisitions). The Freedom Group has a rare set of attributes for a company backed by a private-equity firm: a highly manageable debt load, a pile of cash, expanding margins, and a growing underlying business. In all likelihood, the IPO will be successful.
But the underwriters had better hustle this offering along. Given the nature of war, the demand for bullets and guns by armies (public and private) around the world is likely to be stable. But the consumer market can be more volatile. And as it has become evident that Obama had no secret plan to send out jackbooted thugs to confiscate firearms, there are signs that paranoia-driven sales may be drying up. Look at the FBI background check data again. In September, background checks were up only 12.3 percent from the year before.
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