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Taking stock of GSO

Blackstone's public ‘currency’ is helping the firm expand

The Blackstone Group's $930 million purchase of alternative asset manager GSO Capital Partners in January was notable for many reasons.

The deal added $10 billion in assets to Blackstone's portfolio, bringing its total value to $21 billion. It also brought GSO founder Bennett Goodman into the Blackstone fold, a triumph for co-founder Stephen Schwarzman, who has spent years trying unsuccessfully to hire away Goodman and his team. The acquisition also eased Schwarzman's regret about spinning off BlackRock, Blackstone's erstwhile asset management arm, prematurely.

But one of the more intriguing aspects of the deal was the structure of Blackstone's payment. Blackstone paid $620 million in cash and shares for GSO, with an agreement to pay up to $310 million more over the next five years if certain performance targets are met. In conjunction with the deal, Blackstone will repurchase $500 million of its own shares to offset the shares it issued to pay for GSO. Blackstone said in a statement that it is buying back the stock because it is ?undervalued,? and because Blackstone does not want the issuance of the new shares to dilute its earnings.

The use of stock in this deal showcases some of the benefits a public listing can hold for private equity firms.

Giving GSO a stake in Blackstone creates an alignment of interest between the two firms, and if Blackstone units are actually undervalued the transaction is a profitable one for GSO.

Receiving equity instead of cash also creates tax benefits for GSO.

This particular transaction also allows Blackstone, and a Blackstone-owned entity, to buy shares for around two-thirds of the price at which they were issued.

Perhaps most importantly, the deal shows how Blackstone's public currency can compensate for the absence of leverage after the credit crunch. Mega deals like this one have been few and far between since last summer, but Blackstone was able to close because it didn't need to rely on bank financing.

In the coming months we may see other the other listed firms ? Och-Ziff Capital Management and Fortress among them ? exercise this advantage.