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Tax bill could slash Blackstone earnings

June 16, 2007|From Times Wire Services

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

The tax measure, which would tax publicly traded private equity firms as corporations rather than partnerships, was introduced late Thursday by the Democratic and Republican leaders of the Senate Finance Committee.

Some form of the bill is widely expected to be adopted.

The sudden emergence of the legislation raised the question of whether Blackstone would go ahead with its IPO, which had been expected to take place the week of June 25. The New York-based private equity giant declined to comment. But by amending its Securities and Exchange Commission filings regarding the IPO to discuss the bill, the firm gave the appearance that it intended to proceed with the offering.

Under current law, by organizing as a partnership Blackstone would be able to avoid a 35% corporate tax rate on most of its income. Shareholders would pay taxes as low as 15% on their share of the firm's income.

As the bill is written, a five-year grace period before taxes rise would apply only to Blackstone and Fortress Investment Group, which went public this year. Fortress shares fell $1.64, or 6.5%, on Friday to $23.47 in reaction to the proposal.

Other firms filing to go public after June 14 would face the new tax provisions immediately.

The tax implications may extend to firms that sell stakes on private markets, including Goldman Sachs Group Inc.'s GSTruE exchange, on which Los Angeles-based Oaktree Capital Management sold shares May 22.

Oaktree shares traded Friday at $43.75, down from $47.25 on Monday, when they were last quoted. They started trading at $50, according to Bloomberg News. Representatives of Oaktree and Goldman Sachs couldn't be reached for comment.

Blackstone hopes to raise $3.87 billion to $4.14 billion by selling a 12.3% stake in the IPO, valuing the whole company at $32 billion.

The Chinese government separately has agreed to invest $3 billion in the firm.

Paul Schaye, managing director of Chestnut Hill Partners, predicted that Blackstone would go ahead with the offering despite the tax bill. "I'd be really surprised if this puts the brakes on," he said.

But for other private equity firms considering going public, "This changes the landscape," Schaye said.

There has been speculation that private equity firms such as Carlyle Group, Apollo Management and Kohlberg Kravis Roberts & Co. might go public.

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