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Blackstone: Tax Changes Will Hurt Value

Blackstone Group LP on Friday warned potential investors in its initial public offering that a bill before Congress to change certain tax laws could reduce its earnings substantially in coming years.
/ Source: The Associated Press

Blackstone Group LP on Friday warned potential investors in its initial public offering that a bill before Congress to change certain tax laws could reduce its earnings substantially in coming years.

The New York-based private-equity heavyweight, which is expected to offer its units the week of June 25, said it opposes efforts to tax it as a financial company rather than a partnership. If proposed legislation in the Senate is passed, it would more than double taxes for the company in five years' time.

Analysts believe Blackstone Chief Executive Stephen Schwarzman will spend the weekend weighing if becoming a public company is worth losing the firm's favorable tax structure. One reason that Blackstone is pursuing an IPO was to partially unwind the stakes of its top executives, and to use its new capital as incentive to keep and attract a new crop of management.

Nell Minow, founder of corporate governance watchdog The Corporate Library, said she still believes Schwarzman will pursue the IPO. But, depending on how well received the IPO is even after all the tax implications, others in the industry might hold off on their own plans.

"The thing about the tax code is that it creates anomalous incentives, and Blackstone is going to do what's best for them," she said. "There's a lot of unpleasantness associated with going public. Not only is there this horrifying disclosure they have to do, but also compliance with Sarbanes-Oxley, annual shareholder meetings, and a whole list of other things."

There has been some concern that the tax legislation, introduced late Thursday by the leaders of the Senate Finance Committee, would derail Blackstone's plans. The firm acknowledged the challenge it faces from the bill.

"If this or any similar legislation or regulation were to be enacted and to apply to us, we would incur a material increase in our tax liability and could well result in a reduction in the value of our common units," Blackstone said in a filing with the Securities and Exchange Commission.

Blackstone, and other firms, have been able to take advantage of a two-decade old provision that allows investors in publicly traded partnerships to pay capital-gains taxes of 15 percent on their share of the firm's income. Corporations are currently taxed as much as 35 percent.

As written, the five-year grace period in the bill before taxes rise would apply to only two firms: Blackstone and Fortress Investment Group LLC, which went public earlier this year. Fortress shares fell 6.5 percent to $23.47 on the news.

Any other firm filing to go public after June 14 would face the new tax provisions immediately.

But the Corporate Library's Minow and other analysts believe passing up on the ability to tap into at least $4 billion in capital from an IPO will be too hard for Blackstone to pass up. The flotation is expected to be the biggest so far this year, and shares could bound significantly higher in its first day of trading.

The Senate measure was proposed after a study on how to overhaul tax laws that affect hedge funds and private-equity firms, which as private firms have been able to sidestep regulatory scrutiny. There has been increasing speculation that firms like Carlyle Group, Apollo Management LP, and Kohlberg Kravis Roberts & Co. might consider going public.

After a firestorm of speculation, Blackstone announced in March that it would go public in a deal that would sell investors a 12.3 percent equity stake in its management division.

Buying into the partnership would not give stakeholders any direct involvement in the dozens of companies and real-estate properties managed by Blackstone; instead, it would give investors a 13.6 percent voting interest in the management committee.

Blackstone hopes to raise between $3.87 billion and $4.14 billion in the IPO, when shares are expected to price between $29 to $31. The firm also secured a $3 billion investment from China's government.

The offering would value the entire firm at about $32 billion.

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AP Business Writer Marcy Gordon in Washington contributed to this report.