Sunday, July 22, 2018

Remington Rejects $0.5 Billion Cash Bid from Navajo Nation

TSW Community,

Did you see the news lately?

According to The New York Times, Cerberus rejected an offer valued up to $525M from the Navajo Nation to purchase Remington Outdoor (the gun manufacturer). Remington Outdoor is currently in Chapter 11 bankruptcy.

Navajo's plan for the business included both impact and return-oriented initiatives:

  • Impact Driven:
    • Eliminate AR-15 rifles
    • Eliminate consumer business except hunting rifles and shotguns
    • Invest in R&D around fingerprint "smart" gun technology
    • Shift assembly to the Navajo Nation to create jobs
  • Return Driven:
    • Focus sales efforts on law enforcement and military
    • Leverage minority ownership for contract preference
The Navajo bid was rejected after two months of consideration by the Remington Board of Directors.

The Navajo used the services of turnaround bankers Teneo Restructuring and was advised by attorney Drew Ryce, who was also involved in the attempt by Morongo to acquire gun-maker Colt out of Chapter 11 bankruptcy in 2015.

Both the Colt and Remington pursuits included a core thesis of helping the businesses qualify for government contracts under tribal / minority ownership. Generally, this is through the Small Business Administration's (SBA) 8(a) program. As a program of the SBA, any 8(a) advantages would be subject to size standards (i.e., the maximum size to be considered a "small" business) such as total revenue or number of employees. Assuming the use of NAICS code 332994 (small arms, ordnance and ordnance accessories manufacturing), the SBA states the size standard is 1,000 employees (link here for size standards). A quick google search shows Remington has more than 3,000 employees (source) and, as of Q3 2017, had $467M in revenue YTD.

As for the smart gun technology, NPR's Planet Money and Huffington Post both recently covered the challenges surrounding the technology.

The Navajo Nation made the offer in cash from its $3.3B investment trust. Had the transaction been completed, the single holding would have made up about 16% of the trust portfolio. According to a recent report from the Navajo Times, the trust portfolio is currently made up of 41% domestic equities, 33% in fixed income, 6% in real estate and about 20% in other strategies. RVK advises the trust committee as an investment consultant.

The Master Trust is managed by the six members of the Nation's Investment Committee, made up of the following individuals:
  1. Controller of the Navajo Nation
  2. Appointee of the Navajo Nation President
  3. Chair of the Navajo Nation Budget & Finance Committee
  4. Appointee of the Navajo Nation Budget & Finance Committee
  5. Auditor General of the Navajo Nation 
  6. Attorney General of the Navajo Nation
Interestingly, the President of the Navajo Nation has publicly expressed his concern on the offer:

This would be an interesting case study for future board members and managers of TSW Funds. 

What are your thoughts? How would you weigh the potential risks and rewards? How would you think about portfolio concentration and diversification? How would you balance impact and return-driven objectives? How would you balance the need for confidentiality and transparency? What diligence would need to be done to make you comfortable w/ the deal?

In Perpetuity,

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