New | Troubled German gunmaker Heckler & Koch takes aim at US for sales
From the town that has armed Germany since the 1800s, Andreas Heeschen is fighting a very 21st century battle. The antagonists include regulators and bondholders.
At stake is control of Heckler & Koch, an iconic brand of military and police weapons that descends from Mauser, which made rifles for 19th century empires and later for the Nazis.
Confronting declining sales and creditor concerns, Heeschen, H&K's owner, has a plan to turn the tide: tapping into Americans' love of firearms.
"We are pushing big time there," Heeschen said. He needs to expand in the US because the authorities in Berlin have restricted exports to the Middle East. They have also questioned the reliability of one of its top-selling products, the standard issue G36 assault rifle used by the German army since 1995.
The decline in sales has squeezed company finances, sending its bonds tumbling and pushing it into borrowing at 10 per cent to make interest payments of 9.5 per cent on other debt.
Heeschen, 54, bought H&K in 2002 from British Aerospace, now BAE Systems, with Keith Halsey, owner of English gunmaker Boss & Co. The company is perhaps best known these days for supplying the rifle that may have killed Osama bin Laden.
He is raising H&K's profile as he pushes back against officials who are making his life harder.
The German government restricted weapons exports to areas at risk of conflict in 2013, including Saudi Arabia. That cost H&K as much as €50 million in the first nine months of 2014, with total revenue shrinking to €102 million, down from €153 million in the same period of 2013, according to its private financial accounts. Last month, the Defence Ministry said it had completed a damning report on its G36 assault rifles.
The ministry prepared the analysis - which it has refused to share with the company - after a review of a 2010 ambush in Afghanistan that resulted in the deaths of three German soldiers. The conclusion was that the G36 is inaccurate when it overheats. When Defence Minister Ursula von der Leyen said last week that the rifle "as it's constructed today has no future in the military", H&K's €295 million of bonds due in May 2018 fell to a three-year low of 63.6 cents, to yield 27.9 per cent, data showed.
The notes rebounded to 74 cents, to yield 21.6 per cent, on Thursday after German media reported that the army may alter its inventory of 180,000 H&K rifles rather than junk them. That gives the company the chance to win the contract to modify the weapons. The incident, however, underscored the volatility of a company with about €30 million of both earnings and annual interest payments. The company took out a credit line in November with Bybrook Capital, a London-based hedge fund, to meet its €14 million interest payment. Bybrook charges 10 per cent for the €30 million facility when it is drawn and 4 per cent when it is not.
"Our cash position has improved because of more sales in America," said Heeschen. "At the moment we have enough cash to pay the coupon without using the credit line." With a new range of pistols, he sees US non-government sales approaching US$100 million next year from about US$60 million. The company started preparing for a big push into the US last summer, when it began modifying its machinery to switch production from military rifles to pistols.
Heeschen said he took control of the new strategy by taking over the sales chief's role to accelerate the expansion. The company will need to create new models every year to lure US consumers, he said. For all the hurdles, "small arms are not going out of business", he said. "We are not going to have world peace any time soon."
