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Buyout Giant Goes Shopping in California

Blackstone Group is focusing its substantial financial muscle -- and track record -- on a flurry of deals here.

January 08, 2006|Thomas S. Mulligan | Times Staff Writer

NEW YORK — The current corporate buyout boom is leaving its mark on California, and one name that seems to be popping up all over the state is Blackstone Group.

Last July, the Manhattan-based investment firm bought Legoland in Carlsbad and three other Lego Group theme parks for $457 million. It is advising the Albertsons supermarket chain on an auction to sell the company, a deal that is roiling the Southern California grocery industry and has caught the attention of the Los Angeles City Council.

In December, Blackstone joined a group that is trying to buy San Jose-based Knight Ridder Inc., the nation's second-largest newspaper chain. It's familiar territory for the firm. In 2003, Blackstone bought a piece of Freedom Communications Inc., owner of the Orange County Register.

And just last week, the firm was reported to be mulling over a joint offer with Silicon Valley icon Hewlett-Packard Co. for El Segundo-based Computer Sciences Corp.

For years, so-called private equity firms like Blackstone were the U-boats of the financial world, managing secretive, lightly regulated investment funds that mostly kept out of public view, and surfacing abruptly now and then to buy a company, often in an out-of-favor industry.

But lately, the stealth has gone out of the game. With more than $100 billion of private equity money on the prowl, deals are coming fast and big, involving such familiar brands as Hertz, Lego and Dunkin' Donuts.

"The world is awash" in cash looking for profitable investments, said David J. Brophy, a University of Michigan finance professor who studies venture capital and private equity.

Among the flurry of transactions was Blackstone's teaming with four other firms in November to buy TDC, Denmark's biggest telecom company, in a $15.6-billion leveraged buyout surpassed only by 1988's spectacular RJR Nabisco deal.

Leveraged buyouts -- known as LBOs -- are a favored vehicle for Blackstone and other private equity firms, which deploy funds invested by institutions and wealthy individuals looking for market-beating investment returns.

In an LBO, the buyer puts up a third or less of the purchase price in cash and finances the rest of the deal with loans. The hope is that after being restructured, the acquired company will generate enough cash flow to cover the debt payments as well as pay dividends to the equity investors.

Blackstone and other buyout firms have been criticized for weakening the companies they acquire by loading them with debt and taking excessive fees and dividends. Blackstone spokesman John Ford said that because the firm's ultimate goal was to resell its companies at a profit it was motivated to keep them financially healthy.

The carping isn't deterring investors. Blackstone's latest buyout fund, at nearly $13 billion, is the largest private equity fund ever raised, although in the current climate, it's a record that's unlikely to stand for long.

Investment returns for private equity funds are difficult to pin down, but one expert puts Blackstone's average annual return over its two-decade lifespan at 20%. At a time when the stock market is barely eking out single-digit gains, investors are clamoring to get in.

"Twenty percent for 20 years -- everybody's in their waiting room," Brophy said.

It's an exclusive club, however. Blackstone's minimum investment of $15 million limits the field to institutions -- pension funds, insurance companies and the like -- and very well-heeled individuals.

Two of the firm's biggest investors are the California State Teachers' Retirement System and the California Public Employees' Retirement System, which have put more than $500 million apiece in Blackstone partnerships. Both have been well rewarded. CalPERS, for example, has notched a 37.5% average annual gain on its $84-million investment in a Blackstone fund that opened in 1994 -- almost quadruple the gain in the benchmark Standard & Poor's 500 stock index over the same period.

"They're incredibly smart investors with an extremely good network," said Panda Hershey, who oversees CalPERS' $10-billion private equity portfolio. "Their younger people are very, very hungry."

Top Blackstone executives declined to be interviewed for this article.

Blackstone's rise to a place beside venerable Kohlberg Kravis Roberts & Co. at the top of the private equity heap has largely been the story of the alliance of its two founders. Peter G. Peterson and Stephen A. Schwarzman formed Blackstone in 1985 after leaving Lehman Bros. , where they had been, respectively, chairman and head of mergers and acquisitions.

The firm's name was a play on their surnames -- "schwarz" means "black" in German, while the name Peter comes from the Greek word for "stone."

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