Blackstone IPO: Litmus test for Private Equity?
Sometime today, underwriter Morgan Stanley is widely expected to price the initial public offering of shares in private equity firm Blackstone Group (with trading to begin Friday under the symbol “BX” on the New York Stock Exchange).
A lot could happen over the next few hours, or day, (tax issues and the questionable applicability of an exemption loom) but assuming the deal does move ahead as expected, the 133.33 million common shares to be sold (at an anticipated price of $29 to $31 a share) could raise as much as $5b.
With an additional 20 million share over-allotment available for Morgan Stanley and Citigroup to place if there is excess demand, it will likely be one of the ten biggest IPO’s in US history. The deal will be so large, in fact, it will likely give Blackstone a market-cap equal to about half the value of Wall Street institutions Goldman Sachs or Morgan Stanley.
A lot of people will make a windfall. Blackstone CEO Stephen Schwarzman personally stands to make about $677 million as a selling shareholder and his retained holdings will have a worth upwards of $7b. (He earned a staggering $400m in 2006).
While the deal is huge, and will unquestionably be the biggest offering since MasterCard Inc’s $2.4b offering about a year ago, it is interesting not just for its size but for bringing the focus onto private equity in general. (Not that private equity is lacking the spotlight these days) but one of the world’s largest firms opening its books to SEC filings and the reporting requirements of being public will make for interest reading.
The focus on Private Equity from the offering, legislative concerns and other factors (including fears of what might happen to global economies if a Private Equity firm defaults on a loan) begs some questions:
On a macro scale – is the industry still accelerating even after a blockbuster year in 2006?; and
On a micro scale- will there be more deals to come in the smaller niche of media, entertainment and technology?
The anecdotal evidence says engines are running “full speed ahead.” In 2006 Private equity accounted for between 6% and 18% of acquisitions depending on which reporting agency is quoted, and there was spending of more than $720b (according to Dealogic). 2007 doesn’t seem to be showing any slowdown – both industry wide and within the narrower niche of Metue’s media, entertainment and tech focus.
From powerhouse firms like Blackstone, KKR and the Carlyle Group to more narrowly focused firms like Silver Lake Partners or Elevation, the coffers are full. As predicted, there is arguably more capital now than there are worthwhile deals to deploy it on.
Within Tech and Media, many of the companies once seen as high risk "fliers" are maturing and settling into more stable revenue patterns. Many, especially in software, have solid margins and customers locked into long term supply or service contracts. That kind of annuity-like recurring long term revenue stream, assuming expenses are controlled enough to ensure good positive cash flows, make for possible targets. (Cash flow quality is especially important to cover debt service related to debt used in a leveraged buyout).
Likewise, as media and publishing adapts to the convergence of tech and new media, old-world firms that have struggled to adapt quickly enough, from music labels to publishing houses, may have far more potential than their depressed stock prices might indicate. (Sam Zell certainly thought so in buying the Tribune Co.)
The same is also true for some of the companies that spent heavily to build communication networks and have not yet reaped the rewards (Cablevision, who’s founders continue to try and strike a deal to buy out the remaining shareholders and privitize it, is one example).
There are plenty of underperforming public tech companies with solid customer lists and positive cash flows. Any could be a target for privatization (or roll up). Many could even stand to benefit from the more efficient operating environment they’d gain with new capital and as a private company. Outside the scrutiny of public markets, it’s certainly a lot easier to redeploy capital, trim the bureaucratic fat, focus on R&D or reorganize.
The success of Blackstone, and the information provided in its offering, might be both a litmus test and a perspective on what will follow in the second half of this year.
To show just how active things have been, here’s a small sampling from the past few months:
- KKR bought electronic payment processing firm First Data for $29b. (First data generated $7.1b in revenue after the spin off of Western Union).
- Silver Lake Partners and TPG Capital (formerly Texas Pacific Group) spent $8.2b to acquire business communication and software company Avaya (which generates more than $5b in annual revenue.
- Quadrangle Partners reached a deal a week ago to buy the publisher of Maxim magazine (Dennis Publishing) for a price around $250m.
- Elevation Partners, took a 25% stake in Palm as part of a joint debt and equity deal totaling $725m
- Big 4 music label EMI is still moving ahead with a planned $4.7b buyout from Terra Firma. (and Warner Music is rumored to be preparing a counter-bid).
- Bain and Thomas H. Lee Partners are still seeking a buyout of Clear Channel.
