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When your total annual revenue is around $3 billion and your market cap is worth $17 billion, a $2 billion private equity acquisition DOES stand out. Wednesday, Blackstone (NYSE:BX) agreed to buy Vivint, including Vivint Solar and 2GIG, which is partly owned by the management and partly by Goldman Sachs Group Inc. (NYSE:GS), as well as investment firms Jupiter Partners LLC and Peterson Partners, for in excess of $2 billion.

Vivint is the largest home automation services company in North America and second largest residential security services provider, and when it comes to residential automation and security niche, Blackstone seems to have snagged a large part of the market share in North America.

Peter Wallace, Senior Managing Director at Blackstone, said, "Vivint is the premier provider of home technology solutions - improving customers' lives with world-class home security, energy management, home automation, and solar energy. We believe that the company is well positioned to capture significant share of these emerging markets. Todd Pedersen and the talented team at Vivint have built a remarkable company based on cutting-edge product offerings and superior customer service. Blackstone is excited to partner with them in the next phase of the company's continued growth and innovation."

Vivint is expected to "expand upon their technology-based platform, accelerate the development and release of new services and enter new markets" with the resources and support of Blackstone.

If I am correct, the residential automation and securities market is one stable market to be in. As and when people buy houses, they will need to securitize them. Just as the fact that when you buy a car, you will always get casualty insurance. On a second thought, it might depend on the number of homes being bought and sold. In other words, it does depend on the health of the U.S. real estate market, which is only reviving at the moment from its "bubble burst" and might not harbor hungry customers at the moment.

If you look at the latest quarterly U.S. housing sales report, you will see that figures are improving but not much.

Even the median prices are sticking at the same point. New homes median sales prices show a raise of 2% since the same quarter last year while existing homes median sales prices show a decline of 2-3% since the previous quarter this year. Even when the housing market might be improving, the demand isn't that strong enough to turn up the heat.

If people are not so enthusiastic in buying houses, why will they ever pay for an expensive house automation system or residential alert device? It defies common sense, to be honest. We can only hope Wallace knows what he is doing.

Now, let's take a look at the second quarter financials of the company.

  • Lesser action in the global financial market and significant drop in fund carrying value has already hit the company's total revenue.
  • Total private equity segmented revenue declined to $11.8 million in the second quarter of 2012, compared to $400 million in the last year's quarter and $170 million in the previous quarter this year.
  • Total real estate segmented revenue tanked to $338 million second quarter this year, compared to $648.5 million same quarter last year and $427 million previous quarter this year.
  • Total hedge-fund segmented revenue waned to $71.9 million second quarter this year, against $84.5 million in the last year's quarter and $117.2 million in the previous quarter this year.
  • Total credit businesses segmented revenue improved to $126.3 million second quarter this year, against $97.8 million last year's quarter and $180.85 million previous quarter this year.
  • Total financial advisory segmented revenue ratcheted down to $95.7 million second quarter this year, compared to $104.4 million last year's quarter and $78.2 million previous quarter this year.

Clearly, the investment making power of Blackstone seems to be in question to me, when only $121 billion worth of fees eligible assets under management (AUM) remain among the total portfolio of $190 billion. Apart from the credit businesses, the rest of the business models need an immediate overhaul as it seems. Almost each of these segments shows an average downward slide in the last six quarters, with ups and downs here and there. Even when assets have increased by over 20% since last year's quarter, total revenue doesn't confirm to it, which is a bad signal for the investors.

Blackstone, with its return on average assets (ROAA) at -1.32% compared to 5.86% of Lazard (NYSE:LAZ), 9.2% of Greenhill & Co. (NYSE:GHL) and 2.23% of KKR (NYSE:KKR), does not offer a good reason to invest, apart from the fact that its price-to-book ratio stands at 3.68, one of the lowest in the industry. Even that is doubtful if the fund carrying value keeps on dropping at a steady rate.

The fundamentals are shaky at the moment, and it will take a good few quarters ahead to make a decision.

Source: Blackstone Buys Vivint: What You Need To Know