Lee Schafer: Minneapolis private equity firm decides that guns aren't worth the risk

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: July 6, 2013 - 10:03 PM
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“Did Newtown change our perspective?  Yes,” said Tim DeVries, managing general partner of Northwest Equity Partners. “It made us incredibly happy that we were as careful in our going-in process, and that we avoided the easily abused products.”

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The December 2012 shooting deaths of 20 children and six staff members at Sandy Hook Elementary School in Newtown, Conn., shocked the nation.

They also redrew the line on what Norwest Equity Partners is willing to own.

Norwest Equity Partners, known as NEP, is a Minneapolis private equity affiliate of Wells Fargo & Co. At the time of the Newtown shooting, NEP owned Caliber Co., the parent of the shotgun and rifle manufacturer Savage Sports.

NEP sold the business to the defense contractor Alliant Techsystems (ATK) in late June for $315 million, a price that at least raises the question of how eager NEP may have been to exit.

But it’s not a simple story of a professional investor dumping a deal so as not to risk its reputation.

NEP took care last year to make sure that Savage made hunting firearms that were, as the managing general partner put it, “not easy to abuse.” Then it concluded there was too much risk even in those.

It seems fair to call both the purchase and the sale the actions of a responsible investor.

Tim DeVries, NEP’s managing general partner, explained that the Savage deal fit well with NEP’s continuing interest in sports and outdoors products. Past deals include the life vest company Stearns Manufacturing of Sauk Rapids and Pelican Products, which produces rugged cases, flashlights and other outdoor products.

To DeVries and his partners, Savage was more of a hunting products company than a gunmaker.

The first investment in Savage was by Norwest Mezzanine Partners, an affiliate of NEP that provided subordinated debt to help finance a 2004 buyout. Norwest Equity invested in Savage in early 2012.

“If Savage had [assault weapons] or if Savage had handguns, there’s no way we would have invested,” DeVries said. “We did talk about it very carefully as partners, and we thought long and hard. The heart and soul of Savage is the bolt-action rifle that is used in deer hunting.”

When the Newtown shooting occurred, NEP immediately reviewed the entire product line. A couple of offerings, such as a low-end shotgun best suited for home security, were dropped.

“Did Newtown change our perspective? Yes,” DeVries said. “It made us incredibly happy that we were as careful in our going-in process, and that we avoided the easily abused products.”

As for the Newtown tragedy triggering the decision to sell, DeVries said, “we want to be a responsible citizen, and we want to be perceived as a responsible citizen. [Newtown] was not the driver, but I would not be telling you the truth if I said it wasn’t a factor.”

NEP has just the one principal investor, Wells Fargo, and DeVries said little about Wells other than that it is very protective of its reputation and that Wells did not insist on NEP selling Savage. It seems likely no one from Wells needed to tell him that.

“If I am a bank customer, I don’t have any idea what Wells Fargo is doing in private equity,” said Adam Waytz, a professor who teaches ethics at the Kellogg School of Management at Northwestern University. “It really suggests some genuine ethical interest or political interest, that Norwest would make this decision. It’s not like they have been facing a lot of heat.”

DeVries said NEP had other reasons for the sale, too. It had accomplished much of what it hoped to while Savage was under its ownership, such as improving financial reporting and manufacturing processes, plus it had a willing and well-funded buyer in ATK that knew the business well.

Gun business is booming

Savage was certainly performing. The Boston Globe reported in April that business is booming across the so-called Gun Valley of western Massachusetts and Connecticut, where Savage is located. The outlook was particularly rosy for Savage.

NEP declined to confirm this, but the Globe reported that its growth was 50 percent in 2011, 40 percent in 2012 and was on pace to increase an additional 40 percent in 2013.

ATK said it paid 5.5 times earnings before interest, taxes, depreciation and amortization for the 12 months through the end of March. If the firearms unit is really growing 40 percent annually, then ATK at 5.5 times cash earnings got enough of a deal on Savage Sports to suggest NEP was one motivated seller.

NEP will only say that it was a “very successful” investment and that during its 16 months of ownership, NEP worked with the company to double profitability.

NEP joins with other private equity groups in selling firearms investments this year, including the Blackstone Group and Cerberus Capital Management. Cerberus is seeking a buyer for Freedom Group after being pressured by limited partners appalled that a Freedom unit made the rifle used in Newtown.

In conversations with other private equity investors in Minneapolis, they all have industries they wouldn’t touch. Tobacco is definitely out, for example, as are payday lending and collections businesses. But there wasn’t a blanket refusal to consider any investment related to the firearms industry.

NEP made the right call, though, if it really doesn’t want to make a nickel from the sale of a firearm that might be used in a mass shooting. It’s not always an assault weapon or handgun used in mayhem.

It’s worth remembering the hot summer day in 1966 when a former Marine named Charles Whitman took a small arsenal with him to the top of the University of Texas tower in Austin and began shooting.

Before it was over, Whitman had killed or fatally wounded more than a dozen people and injured many others. The most lethal weapon he used that day was a Remington model 700, a simple bolt-action rifle.

A deer hunting rifle.

 

lee.schafer@startribune.com 612-673-4302

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