Blackstone Profit Drops 89% on Lower Fees, Writedown

Blackstone Profit Drops 89% on Lower Fees, Writedown

March 10 (Bloomberg) -- Blackstone Group LP, manager of the world's largest leveraged-buyout fund, said fourth-quarter profit fell 89 percent on lower takeover fees and the writedown of its holdings in bond insurer Financial Guaranty Insurance Co.

Profit excluding some compensation costs declined to $88 million, or 8 cents a share, from $808.1 million, or 72 cents, a year earlier, the New York-based company said today in a statement. That fell short of the average estimate of 20 cents a share by seven analysts in a Bloomberg survey.

Blackstone's stock has fallen 53 percent since going public in June as a doubling in credit costs froze the LBO market. The firm, run by Stephen Schwarzman, hasn't announced a takeover of more than $2 billion since agreeing to buy Hilton Hotels Corp. for $20 billion nine months ago, and is struggling to complete the $6.6 billion buyout of Alliance Data Systems Corp.

``Among the risks are that LBO financing conditions continue to worsen and erode Blackstone's ability to earn sufficient private-equity returns,'' Banc of America Securities Inc. analyst Michael Hecht wrote in a March 6 report to investors. Hecht, who is based in New York, cut his fourth- quarter estimate to 11 cents from 25 cents.

Results were released before the start of regular New York Stock Exchange composite trading. Blackstone closed March 7 at $14.58, compared with its initial public offering price of $31. It fell to $14.25 at 8:54 a.m. on electronic markets.

Market Freeze

Blackstone reported a fourth-quarter net loss of $170 million because of compensation costs tied to the IPO. Revenue rose 17 percent to $3.05 billion. The firm agreed to buy GSO Capital Partners LP for as much as $930 million in January to expand investments in distressed debt and leveraged loans.

LBO financing evaporated last July as banks and investors pulled out of the market amid the fallout from rising subprime- mortgage delinquencies. The value of deals announced in the second half of 2007 plunged two-thirds from the first six months, according to data compiled by Bloomberg.

``We're a proxy for the credit markets,'' Blackstone President Hamilton James said at the Super Returns private equity conference in Munich on Feb 26.

Still, seven of the eight analysts who rate Blackstone recommend clients buy the stock, including Hecht. The other recommendation is a ``hold.''

Other publicly traded companies that make private-equity investments also have suffered. New York-based Fortress Investment Group LLC has fallen 58 percent in the past year, while 3i Group Plc of London has lost 42 percent.

`Complicated Company'

``We're a very complicated company that the market doesn't understand,'' James said last month. ``I don't think the market understands the model or how to value the company or how to predict the results. The accounting is incredibly opaque.''

Wall Street analysts who follow Blackstone base their estimates on what the firm calls ``economic net income,'' which doesn't conform with generally acceptable accounting principles for net income and excludes compensation costs related to the eight-year-vesting period for Blackstone executives' ownership in the firm.

``They're an enigma from a financial analysis perspective,'' said Brian Hamilton, chief executive officer of Sageworks Inc., a Raleigh, North Carolina-based firm that uses computer programs to analyze financial statements. ``The hardest part is literally reading the financial statements.''

BLOOMBERG