LBO Slump to Keep Hurting Blackstone - Barron's

Since private equity Blackstone Group's IPO in June, (BX) shares have nearly halved from $35 to $18. Bulls cite strong management, cheap P/E of 12 times 2008 earnings, or $1.49/share, and a dividend yield of 6.5% in forecasting a return to $30 shares. But Barron's notes fewer leveraged buyouts, tighter credit markets and competition from cash-soaked sovereign wealth funds are likely to take a toll on Blackstone's earnings. Worse, the firm's incentive fees of 20% of profits—collected only if it continues to top 8% returns—could reverse themselves if the economy continues to weaken and deals fail. Blackstone's "claw back" bylaws will force it to return fees to investors. EPS could fall under $1.

Several Blackstone LBOs are already in trouble: The $17.5 billion buyout of semiconductor-maker Freescale has struggled under falling revenues and massive debt. The $26B buyout of Hilton Hotels appears to be ill-timed as hotel shares plunged during the ongoing housing slump. A tabled LBO of Alliance Data Systems (ADS) looks like it will collapse altogether. Though the firm's managed assets grew 40% to $103B in 2007, its size may not be enough to keep the buyout king's shares buoyant. Barron's foresees $15 shares.

Comments

[Carlnat:]

I think Barron's hits the nail on the head, but where are the questions about these deals that had a poor chance of being successful in the kind of market that we are in today. It also shows that firms who we considered masters of the private equity universe ,were only masters in a very unique environment. On a playing field with low interest rates,low lending standards, low regulatory oversight, extraordinary investment banking,legal,accounti... and consulting fees the race was on and everyone wanted to imbibe at this party of private equity deals. But like every party you better have a chair when the music stops. The last song played at this party was " Private Equity IPO's". The masters have been doing this since the beginning of time. We all remember Goldman's IPO just before the bubble burst the last time.

Has anyone asked the masters why they did not, while structuring these private equity deals, use a model that might have taken into consideration a change in the landscape like a subprime debacle? The masters had to see these markets starting to spin out of control because they were using credits markets all the time. The Wall Street community is very small and everyone knows what's going on in their neighbor's back yard. I think they did see it coming so they like any other group of Wall Street guys, they went public.

With that said -we have all seen this before, take a look at GS's chart since 1999. The same critics were out there then. As the terminator said " I will be back" And I think there is a good chance that they will be back - these guys are too smart to rollover. That's why I have them on my watch list. Another reason I keep them on my watchlist is that if they announce that they are going private - I will buy the market.

2008 Feb 03 06:16 PM