The Blackstone Group’s planned $4.75 billion initial public offering may be a bonanza for founders Stephen Schwarzman and Peter G. Peterson. What it won’t be is a windfall for Wall Street, where the underwriters are getting a fraction of the fees they typically command for IPOs.
Morgan Stanley, Citigroup Inc. and the 15 other investment banks that Blackstone hired to distribute shares in Thursday’s IPO will get a 3.6% commission, or as much as $170 million (Rs697 crore), according to regulatory filings. That’s slightly more than half the 6.2% average rate banks charged US companies to go public this year.
The securities firms are accepting the lower fee because they expect to make a lot more arranging and financing takeovers when New York-based Blackstone invests its $19.6 billion buyout fund, the second-biggest ever raised.
Schwarzman’s firm paid $571.4 million for those services last year and $248.1 million in the first quarter of 2007 alone, according to estimates by industry consultants at New York-based Freeman & Co.
“It’s the fee pool they control,” chief executive officer of Bank of America Corp.Kenneth Lewis, said in a 19 June interview. “You’re not just doing it for that one deal.”
Blackstone’s fee compares with the 7% that Wall Street firms have levied for decades for access to the US equity market. While commissions for offerings of more than $1 billion tend to be smaller, few have been as low as what Blackstone is paying.
MetroPCS Communications Inc., a mobile-phone company whose $1.3 billion IPO was the largest by a US company so far in 2007, paid 4.7% in April, according to Bloomberg data.
Even before Blackstone whittled down Wall Street to 3.6%, US underwriters were under pressure to reduce fees to stay competitive. Companies that go public on European stock exchanges pay an average of only 3.2%, and multibillion-dollar deals can be done for as little as 1%.
Bank of America in Charlotte, North Carolina, is one of the 17 banks working for Blackstone. The others include: Merrill Lynch & Co., Credit Suisse Group, Lehman Brothers Holdings Inc., Deutsche Bank AG, ABN Amro Holding NV, Goldman Sachs Group Inc., UBS AG, JPMorgan Chase & Co., Wachovia Corp., Bear Stearns Cos, Lazard Capital Markets Ltd, Nikko Cordial Corp., Skandinaviska Enskilda Banken AB, Wells Fargo & Co.
The IPO, the largest by a US company this year, was thrown into doubt last week when the Senate Finance Committee introduced legislation to tax buyout firms that sell stakes like corporations. Schwarzman, who received the news while accepting the Yale Chief Executive Leadership Institute’s Legend in Leadership Award at the New York stock exchange, put the speculation to rest two days ago when Blackstone moved up the offering to Thursday from next week.
On Wednesday, committee chairman Max Baucus said that he’s “open” to reducing the five-year waiver that Blackstone and Fortress Investment Group Llc would get under the proposed legislation.
Separately, a junior congressman introduced a Bill that would tax the firms at a higher rate immediately.
Blackstone plans to sell shares for $29-31 apiece, according to filings with the US Securities and Exchange Commission. At the midpoint of that range, the company would have a market value of about $32.5 billion, with 12.3% of the shares held by the public.
Blackstone offers investors only the second opportunity to participate in profits made by the type of partnerships that manage most private equity and hedge funds. The firm’s $2.27 billion in net income last year translates into about $2.95 million for each of its 770 employees—or nine times as much as the average at Goldman, the world’s largest securities firm by market value.
Fortress, the first such partnership to go public in the US, has gained 43% since its February IPO and now has a market value of $10.8 billion. Fortress paid a 6% underwriting commission.
Buyout firms have announced $533.8 billion of acquisitions this year, putting them on pace to eclipse last year’s $701.5 billion record before the end of the third quarter, Bloomberg data shows.
Blackstone led the year’s largest completed LBO, the $19.9 billion purchase of Chicago-based Equity Office Properties Trust. Merrill earned a $30 million fee for advising Equity Office Properties.
Kohlberg Kravis Roberts & Co. paid investment banks $757.9 million last year for takeover advice and financing, the most of any private equity firm, according to the Freeman estimates. Blackstone was second, followed by Apollo Management LP with $541.4 million, and Goldman Sachs’s private equity arm, which paid $535.3 million.
Private equity managers also wield leverage over Wall Street because most, including Blackstone’s founders, were bankers themselves. Schwarzman, 60, and Peterson, 81, worked together at Lehman before founding Blackstone in 1985 with $400,000. Since then, they have hired dozens of industry veterans, including Hamilton “Tony” James, the former chairman of investment banking and private equity at Credit Suisse.
As much as Blackstone may want to pay even less, it can’t risk losing the goodwill of bankers on whom it relies to get access to the best deals, said Scott Moeller, a former Morgan Stanley banker.
“They are working with people with whom they need strong relationships,” said Moeller, who now teaches at City University’s Cass Business School in London. “They are dependent on the good deal flow in the future. This is about giving part of it back.”
When Kohlberg Kravis co-founder Henry Kravis raised $5 billion for one of his private-equity funds in a public offering in Amsterdam last year, a deal that didn’t give investors a slice of management and performance fees, he paid a 5.4% fee, or $270 million.
Schwarzman, whose company stock will be valued at $7.7 billion after the IPO, James and Chief Financial Officer Michael Puglisi showed off Blackstone’s muscle at meetings with investors over the past two weeks.
At a June 14 luncheon at Manhattan’s Pierre Hotel, Blackstone transformed the baroque ballroom into a setting more suited to a fashion show, complete with neon blue lighting, floral arrangements and dozens of event staff outfitted in white shirts, ties, vests, pants and jackets. Blackstone accented the white vases and seat cushions with its black BX ticker symbol.
Justin Baer and Will Edwards in New York and Edward Evans in London contributed to this story.