Blackstone may have to cut range for IPO

NEW YORK (Reuters) - Blackstone Group LP BG.UL could have to cut the expected price range for its initial public offering in the face of possibly troublesome tax legislation and rising bond yields, some portfolio managers and analysts said on Friday.

Those investors expect this week's events to cut the price guidance anywhere from 2 percent to 6 percent.

The questions come a day after two U.S. senators proposed legislation that could boost the top tax rate for private equity firms that go public by more than 100 percent, to 35 percent from 15 percent.

On top of the tax bill, bond yields have risen dramatically. The 10-year Treasury yield has risen some 0.6 percentage points over the last month, which potentially boosts financing costs and lowers returns from deals.

"In isolation, the potential tax change would be less of a concern, but all together people may step back and re-evaluate at this point," said Francis Gaskins, president of independent research firm IPOdesktop.com.

To be sure, several investors and analysts interviewed expected demand from retail investors for Blackstone's IPO to be strong regardless of the recent flies in the ointment.

But Blackstone acknowledged in an amended prospectus on Friday that the new risk could materially lower the value of its partnership unit, although it kept the proposed pricing range for its shares at $29 to $31.

The proper way to value Blackstone's shares was the subject of some debate even before the legislation was introduced.

Assuming the company's earnings rise by 20 percent a year, it will generate pro forma net economic income of $1.75 billion in 2007. That amounts to $1.34 per partnership unit.

At the midpoint of the expected range, Blackstone would trade at about 22.5 times expected 2007 earnings. That is on par with T. Rowe Price Group Inc. (TROW.O) and a smidge higher than BlackRock Inc.(BLK.N), both of which are more established, are turning in solid growth rates and have more predictable earnings, an analyst at a major fund manager said.

He reckons that Blackstone in a few years should trade at closer to 16 or 17 times expected current-year earnings, and is not buying the shares in the offering.

HOW MUCH BETTER THAN GOLDMAN?

A hedge fund portfolio manager noted that Goldman Sachs Group Inc. (GS.N) trades at around 10.5 times earnings, but has a much more diversified earnings base. He may buy Goldman shares and short Blackstone shares a few weeks after they are issued, a trade that makes money if their valuations move closer to each other.

Not everyone is convinced a price guidance cut is in the offing.

Any proposed legislation could be very different by the time it passes, if it passes at all, said Peter Kovalski, an analyst covering financial stocks for Alpine Woods Capital Investors, which has over $12 billion in assets under management.

And David Menlow, president of research firm IPOfinancial.com, said Blackstone will likely figure out a way to cope with any tax legislation.

"The people inside Blackstone are of the highest intelligence in this field and they will figure out a way to squeeze more money out of whatever future investments they are doing," Menlow said, adding he expects the IPO to price at the upper end of the current range.