Goldman, JPMorgan take minor Blackstone IPO roles

By Joseph A. Giannone

NEW YORK (Reuters) - Goldman Sachs Group (GS.N) and JPMorgan Chase & Co. (JPM.N), once excluded from Blackstone Group LP's pending $4 billion initial public offering, in the end have been invited to participate in the biggest market event this year.

The two Wall Street titans are, however, stuck in the cheap seats.

In its latest IPO proxy, the private equity investment giant listed 17 underwriters led by Morgan Stanley (MS.N) and Citigroup Inc. (C.N) for an offering expected next week.

Goldman and JPMorgan, conspicuously absent from the largest U.S. offering of the year when filed in March, were quietly added to the list in Blackstone's latest IPO prospectus on Monday.

But they were only listed among 11 third-tier co-managers that will buy and distribute Blackstone stock to investors.

"It's unusual for Goldman to play second fiddle. Typically it's 'If we're not book-runner, we're not interested,"' said Clemson University assistant professor Daniel Bradley, who tracks IPO activity. "This is a high-profile deal."

Officials from Morgan Stanley, Citi, Goldman and JPMorgan declined to comment.

Blackstone BG.UL, one of the world's largest private equity investment firms, filed in March to sell more than 133 million shares, a 10 percent stake, in an IPO that could raise $4.75 billion. It would be the sixth-largest U.S. IPO ever.

Below Morgan Stanley and Citi, co-managers in the initial prospectus included Merrill Lynch MER.N, Credit Suisse (CSGN.VX), Lehman Brothers LEH.N and Deutsche Bank (DBKGn.DE).

But Wall Street was abuzz when Goldman, the world's top stock underwriter, and JPMorgan, an important financial backer to Blackstone over the years, were left out. Their absence immediately prompted speculation that the banks had landed in Blackstone's doghouse.

Sources at the time said Goldman and JPMorgan were sidelined because they had already agreed to take public rival private equity firm Apollo Management. Goldman and JPMorgan declined to comment; no Apollo deal has been registered.

But other people familiar with the Blackstone deal contend Goldman's absence reflected concern among several buyout firms that the Wall Street financier and merger adviser had grown too aggressive as an equity investor and competitor for buyouts.

As Blackstone unveiled plans to go public, Goldman executives disclosed the bank would soon close a $20 billion fund, the largest ever.

A Blackstone spokesman, who declined to comment on the IPO, denied there was ever bad blood between the firm and Goldman. "We're still doing deals with them. We're working very closely with them," he said.

Regardless, Goldman and JPMorgan won't be getting rich off their Blackstone IPO work.

An underwriting source said Blackstone negotiated a reduced underwriting fee of about 3.75 percent -- well below the standard 7 percent fee for U.S. IPOs -- or roughly $150 million to $180 million to be shared among 17 banks.

The fees are especially thin for the 11 co-managers added to the amended proxy on Monday: ABN AMRO Rothschild AAH.AS, Bank of America (BAC.N), Bear Stearns Cos. BSC.N, Lazard Capital Markets (LAZ.N), Nikko Citigroup, SEB Enskilda, UBS (UBSN.VX), Wachovia Corp. WB.N and Wells Fargo and Co. (WFC.N), along with Goldman and JPMorgan.

"These guys in the lower tier on this deal are not getting much in terms of the underwriting proceeds," Clemson's Bradley said.