Blackstone: The Stock Buyback Which Isn’t

Stock buybacks are good news for shareholders for two reasons. Firstly, they increase demand for the stock, which helps boost the share price – but that effect is one-off, and temporary, and mostly benefits the shareholders who sell their stock – ie, it benefits ex-shareholders more than current shareholders. Secondly, all the ownership benefit which used to belong to those ex-shareholders now belongs to the current shareholders. That’s the main benefit of a buyback, from a long-term shareholder’s point of view: it’s essentially the opposite of a dilution. (A reduction, perhaps?)

Today, Blackstone announced a $500 million stock buyback, as part of its $930 acquisition of fund manager GSO. But this buyback doesn’t benefit shareholders nearly as much as most buybacks do. Steven Davidoff explains:

The real winner here is Stephen A. Schwarzman, chairman and chief executive officer of Blackstone. Blackstone Holdings, the publicly-traded Blackstone partnership, is issuing these units to GSO but the purchaser of the units in the market will not be this entity. This is unusual, as typically in share repurchases it is done by the company itself so that all shareholders can share in the effect of the buyback and the presumably undervalued price realized.

Rather, here a Blackstone company owned by Mr. Schwarzman and the other Blackstone partners, Blackstone Group Management LLC, will make the purchase. The Blackstone partners are thus buying back the equity they sold for a significantly higher price six months ago and depriving their remaining public shareholders the primary benefit of that repurchase. Chutzpah.

Got that? The shareholders (technically unit holders) own a company called Blackstone Holdings. But Blackstone Holdings isn’t the entity doing the buyback – that would be Blackstone Group Management, which is owned not by the shareholders but rather by Blackstone’s senior management. So all the ownership benefit from those shares will go straight to Steve Schwarzman and friends, not to the long-suffering shareholders.

Recommendation: Sell. Blackstone might be a good company, but it treats its shareholders like shit, and if you own a minority stake in the company you simply can’t expect to be treated fairly.

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