Blackstone Looks Bleak On Potential Writedowns - Barron's

Blackstone Group (BX) CEO Steve Schwarzman opposes mark-to-market accounting during difficult market conditions. This opposition may be guiding Schwarzman's company during the current crisis, says Barron's Andrew Bary, as Blackstone appears to be overly generous in valuing its private equity and real estate investments. Investors should be wary, as a more realistic accounting could send shares tumbling even lower.

Blackstone went public last year at $31/share and is now trading at $7.51 per share. The stock lost nearly 18% last week on a poor earnings report, including Q3 average markdowns of 8% on its private equity funds and 10% on its real estate funds. However, with a weakening economy, a drop in the markets and depressed prices on bonds held by Blackstone, these markdowns are probably not realistic and raise the possibility of further write-downs.

The company has defended its valuations, arguing that most of its investments are doing well and analysts need to bear in mind the long term nature of its holdings. However, it's difficult for analysts to hold Blackstone up against comparable public companies since Blackstone won't publicly disclose the carrying values of its individual private equity and real estate investments. Ironic, considering Schwarzman called for 'full transparency' of financial statements in a Wall Street Journal op-ed column last week.

To name just two examples of markdowns waiting to happen, Blackstone has invested in Freescale Semiconductor and Hilton Hotels. On Freescale, one of Blackstone's equity partners has written down its stake by 50%, some of Freescale's debt is trading for $0.40 on the dollar and the company posted a Q3 $3B writedown. Hilton is probably overleveraged and Blackstone's $6B equity interest likely has little value now.

• Roger Freeman, of Barclays Capital, cut his 2009 earnings estimate to $0.35 per share from $1.00 per share, citing "the potential for further markdowns in the private-equity and real estate portfolios." He expects a Q4 loss of $0.32 per share, though he maintains a $24 price target.

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• Blackstone (BX): Q3 EPS of -$0.44 vs. $0.01. Revenue of $179M vs. $263M. Says it remains liquid with $1.13B in available cash and another $1.29B in liquid funds. (PR)
• From the company's Q3 press release: "Given Blackstone's strong balance sheet, scale and breadth of business and continued strong investment performance, we believe that the current market dislocations will alter the competitive landscape, position our firm to enhance our market position and enhance long term unitholder value."
• Two weeks ago, Blackstone and South Korea's pension fund signed an initial agreement to invest $2B each in South Korea. Blackstone plans to invest in infrastructure, real estate and domestic stocks and bonds.

Comments

[investor88:]

Good article on Blackstone. Prospects doesn't look good and is sign of difficult times generally.

2008 Nov 09 08:48 AM

[MrBuzz:]

The Blackstone - Hilton investment is a pretty solid investment. Having been in this business for over 17 years, I can attest to the idea that Hilton is in a great position for growth. The WSJ crowd with big bucks may focus on the Conrad etc..... type operations. But, lets not forget. They also own Hampton Inn, Embassy Suites and ESA. The future growth of these in Asia alone is huge.

There are 5 other major investment areas that show long term growth also for Blackstone. Pete Peterson normally knows what he is doing.

2008 Nov 12 11:25 AM

[MrBuzz:]

Blackstone can do well in near future. The results maynot show by quarter end or next. But, the people here are not your typical wallstreet bumbs. They will find honorable way to make money during this time period.

I have faith in Steve and Pete. And in relation to money and business it all comed down to Trust ! Buzz

2008 Dec 16 03:59 PM

[MrBuzz:]

I decided to go back and read this again. Blackstone, Hilton, now Universal and add the buy of Busch Entertainment or Sea World and Busch Gardens. There is smart money here. I am not smart. I am just hard working hourly guy. But, this company has good people and I think they will be doing well in 2010.

Oct 14 11:42 PM