Is Blackstone over-valued at $30 a share? That's the share price the private equity company is aiming at for its initial public offering. But Breaking Views this morning takes a closer look at the numbers and raises serious questions about what kind of earnings multiple is appropriate for the private equity company.
The $30 share price assumes a valuation of around $30 billion, 25 times earnings. Breaking Views thinks that multiple might be justified but warns that the company might be facing huge increases in two types of expenses: taxes and compensation costs.
Blackstone is taking an unsustainably low compensation charge in its pro forma accounts. The firm says that, in future, 40% of the performance fees will go to employees. But the 2006 accounts allocate only 18% to them. In the short term, Blackstone can get away with such a low percentage because senior employees will have shares in the company which they will lose if they leave. But as those shares vest, Blackstone will have to increase its compensation to hang onto its employees. That's why it expects the percentage to rise over time.
And, of course, Blackstone is facing the possibility of being taxed at the corporate rate under the so-called Blackstone Bill introduced by Capitol Hill lawmakers last week. Breaking Views concludes that the appropriate share price, assuming a 25 times multiple, is far less than $30 a share.
Accounting for Fees May Add Up To Slash Blackstone's Valuation [Wall Street Journal]