Blackstone: The Stock Buyback Which Isn't

Stock buybacks are good news for shareholders for two reasons. Firstly, they increase demand for the stock, which helps boost the share price - but that effect is one-off, and temporary, and mostly benefits the shareholders who sell their stock - ie, it benefits ex-shareholders more than current shareholders. Secondly, all the ownership benefit which used to belong to those ex-shareholders now belongs to the current shareholders. That's the main benefit of a buyback, from a long-term shareholder's point of view: it's essentially the opposite of a dilution. (A reduction, perhaps?)

Yesterday, Blackstone (BX) announced a $500 million stock buyback, as part of its $930 million acquisition of fund manager GSO. But this buyback doesn't benefit shareholders nearly as much as most buybacks do. Steven Davidoff explains:

The real winner here is Stephen A. Schwarzman, chairman and chief executive officer of Blackstone. Blackstone Holdings, the publicly-traded Blackstone partnership, is issuing these units to GSO but the purchaser of the units in the market will not be this entity. This is unusual, as typically in share repurchases it is done by the company itself, so that all shareholders can share in the effect of the buyback and the presumably undervalued price realized.
Rather, here a Blackstone company owned by Mr. Schwarzman and the other Blackstone partners, Blackstone Group Management LLC, will make the purchase. The Blackstone partners are thus buying back the equity they sold for a significantly higher price six months ago and depriving their remaining public shareholders the primary benefit of that repurchase. Chutzpah.

Got that? The shareholders (technically unit holders) own a company called Blackstone Holdings. But Blackstone Holdings isn't the entity doing the buyback - that would be Blackstone Group Management, which is owned not by the shareholders but rather by Blackstone's senior management. So all the ownership benefit from those shares will go straight to Steve Schwarzman and friends, not to the long-suffering shareholders.

Recommendation: Sell. Blackstone might be a good company, but it treats its shareholders like shit, and if you own a minority stake in the company you simply can't expect to be treated fairly.

Comments

[eternitus:]

Felix,
I'm not sure the press release stated that Blackstone Management will be buying the units. Blackstone management controls Blackstone Group (the public company) as General Partner, and I believe they are directing the public company to repurchase the shares. If that is the case, then the shares will inure to the benefit of all shareholders.

What I would like to know is what portion of these funds will go to buy back units of Blackstone Holdings (Schwarzman and his buddies) and at what price, especially when these units are supposedly equivalent to the publicly traded units.

As you can see from above, the operation of the company is confusing, and because public shareholders can never control the company (the general partner always controls in a limited partnership)... the only thing keeping interests aligned is the huge holdings of the insiders.

2008 Jan 11 08:59 AM

[Augustus:]

It does not matter much which entity does the buying.
If I want some BX shares, there is no shortage.
If the partners want to use their money to purchase a bigger piece of the company, good for me also.
I don't own it. But I would not consider this purchase a signal to sell it. Maybe those partners know more about what it is worth than FS does? And here I'd read somewhere that "insider buying" was supposed to be a good thing.

2008 Jan 11 10:54 AM

[eternitus:]

Full Disclosure: I've been buying since BX breached $20. Way undervalued because most don't understand the business.

2008 Jan 11 01:39 PM

[rodcore:]

I think it is a buy here, but it is hard not to feel something sinister is at play at Blackstone. The entire IPO was a fleecing. The management at Blackstone will always do what is right for them. If that interest aligns with the shareholders then you could benefit. The more shares they buy back (through any entity) the more of a chance of that alignment taking place.

2008 Jan 13 07:08 PM