Net income triples for Blackstone - Challenges ahead

Blackstone Profit More Than Triples to $774 Million (Update11)
By Jason Kelly

Aug. 13 (Bloomberg) -- Blackstone Group LP, manager of the world's largest private-equity fund, said second-quarter earnings more than tripled as revenue increased during a record year for leveraged buyouts.

Net income was $774 million compared with $224 million a year earlier, New York-based Blackstone said today in its first report as a public company. Profit excluding some compensation costs rose to 46 cents a share from 11 cents, exceeding the 34- cent estimate expected by analysts surveyed by Bloomberg.

The firm, founded in 1985 by Stephen Schwarzman and Peter G. Peterson, more than tripled revenue in its main private- equity business. While the early part of the period was ``fundamentally positive,'' concern over the U.S. housing market and the volume of debt waiting to be financed for LBOs created ``more challenging financing conditions'' that are continuing, Blackstone said in the statement.

``The market's realizing that private equity, and Blackstone, aren't going away,'' Paul Schaye, managing partner of Chestnut Hill Partners in New York, said today. ``We're seeing a tightening of the debt markets, but these are smart guys.'' His firm helps buyout firms find deals.
Stock Rises
The stock climbed 43 cents, or 1.7 percent, to $25.71 at 4:02 p.m. in New York Stock Exchange composite trading after rising as much as 7.8 percent earlier. Before today, the stock had dropped 18 percent from the $31 offering price. Schwarzman and Peterson stood to collect a combined $2.33 billion from the IPO, according to a June filing. Schwarzman made $398.3 million last year, and Peterson earned $212.9 million.

Firms including Blackstone have announced a record $716.7 billion in private-equity transactions so far this year, according to data compiled by Bloomberg, though the pace of deals slowed by a third in July from June. Blackstone on July 3 said it had agreed to buy Hilton Hotels Corp., the second- biggest U.S. hotel chain, for $20 billion.

Blackstone operating chief Tony James said today on a conference call the Hilton transaction is on schedule and financing is in place. He acknowledged that more ``mega-deals'' are less likely because banks are reducing risk and favoring business with their ``biggest'' clients, an advantage for Blackstone.

`Clearly Harder'
``Setting up new deals in this environment is clearly harder,'' James said on the call, noting the U.S. economy hasn't slowed noticeably, which supports mergers and acquisitions.

The extra yield investors demand to own non-investment- grade corporate bonds rather than Treasuries has widened to 412 basis points from a record low of 241 on June 5, Merrill Lynch & Co. index-data show.

Other firms have sought to sell stakes in their management companies in deals similar to Blackstone's. Kohlberg Kravis Roberts & Co., based in New York, filed for an IPO on July 3 to raise about $1.25 billion. Apollo Management LP earlier this month sold shares to qualified investors through Goldman Sachs Group Inc.'s private exchange.

KKR said in a filing today that financing costs ``recently increased significantly,'' potentially hampering returns on its investments.
Shares of Fortress Investment Group LLC, the first U.S. manager of hedge and private-equity funds to go public, rose $1.47, or 7.7 percent, to $20.57 today. The New York-based firm, which sold shares to the public in February, is scheduled to report earnings tomorrow before the stock market opens.

Blackstone had a net loss of $52.3 million, or 20 cents a share, from June 19 to June 30, the only days in the period it was structured as a public company.

Acquisitions
Revenue climbed to $975 million from $325 million. Private- equity revenue growth accelerated to $426 million compared with $227 million during the first three months of the year.

Blackstone this year also has purchased Equity Office Properties Trust, the largest U.S. office landlord, and agreed to buy credit-card processor Alliance Data Systems Corp.

The firm said Aug. 8 it had finished raising its latest buyout fund, the industry's largest at $21.7 billion. Blackstone also is raising about $11 billion for a new property-investment fund, mostly from pension funds, endowments and foundations.

The debt markets critical to funding leveraged buyouts dried up during July as investors rejected loans and bonds for purchases of companies including Alliance Boots Plc and DaimlerChrysler AG's Chrysler unit. About $330 billion in loans and bonds remain to be sold to fund announced deals, according to an Aug. 8 report by Citigroup Inc. analyst Prashant Bhatia.

Flow of Deals
``A prolonged credit cycle could hurt the flow of deals and cause lower deal sizes,'' yet looser terms offered by banks may help Blackstone wait out the credit crunch, Deutsche Bank AG analysts Matthew Fischer and Mike Mayo wrote in an Aug. 1 note to investors. They rate the shares ``buy'' and don't own them.

Blackstone's offering and the high profile of Schwarzman, who threw himself a 60th-birthday party in New York earlier this year, were followed by scrutiny from the U.S. Congress over taxes paid by private-equity firms. The House of Representatives and Senate are considering measures that would force private- equity firms to pay taxes at more than double the current level.

Taxes are among concerns cited by analysts trying to determine if Blackstone shares are worth owning. Seven analysts recommend buying the stock; one, Douglas Sipkin of Wachovia Securities Inc., recommends holding the shares.

Sipkin has the lowest price target, at $25.50. Banc of America Securities' Michael Hecht says the shares may rise to $38 a share.