Blackstone Group LP (BX), the private- equity firm known for raising the largest buyout fund ever, has emerged from the recession with a new reputation: one of the world’s busiest restructuring advisers.
Among casino resorts in particular, where fallout from the financial crisis continues to hamper a recovery, New York-based Blackstone has become a leading workout adviser. The team, led by senior managing director Timothy Coleman, is involved with at least three of the largest current assignments: Kerzner International Ltd, the Mashantucket Pequot Tribe’s Foxwoods Casino, and the Mohegan Tribal Gaming Authority, which owns the Mohegan Sun casinos. The three companies have more than $8.5 billion in combined liabilities.
“Blackstone has kept busy as restructuring activity slows down,” said Richard Cieri, a partner at Kirkland & Ellis LLP who specializes in restructuring. “The private-equity business embraces the advisory business and they work well within one firm. It’s a unique model.”
Restructuring assignments, which have also included Ford Motor Co. (F) and the Ukrainian government, made Blackstone’s advisory unit the firm’s only profitable business at the peak of the credit crisis in 2008. Competitors including KKR & Co. and Carlyle Group have followed Blackstone’s lead in diversifying from buyouts, entering such businesses as underwriting stock and bond offerings and taking stakes in hedge funds and private- equity fund of funds.
In-House Team
Blackstone, the largest private-equity company by assets, is also the only major buyout firm with an in-house restructuring team -- a distinction that cuts both ways. Coleman’s team benefits from Blackstone’s relationships and expertise, and helps guide those businesses with its own views. The group may also lose business to other Blackstone units pursuing an investment in a would-be client or miss assignments because the troubled company is owned by a rival buyout fund.
As the recovery from the financial crisis continues, companies are relying less on restructuring advice, making it harder for firms to win business. Lazard Ltd., the largest independent merger adviser, posted a decline in first-quarter earnings after revenue from advising on bankruptcies and restructurings slid 65 percent to $35.6 million.
Blackstone co-founders Stephen Schwarzman and Peter G. Peterson, former Lehman Brothers Holdings Inc. colleagues, started the company in 1985 as an advisory firm, then turned to the nascent business of buying and selling companies that’s become their signature product. In 1991, they added restructuring, Schwarzman said, as “a wonderful countercyclical business.”
Fenster, Newman
“We knew what was going to happen with the M&A business, and we were looking for an offset,” Schwarzman said in an interview. He called his friend and former Lehman colleague Steven Fenster, who told him the man to hire in restructuring was Arthur Newman, who’d recently left Ernst & Whinney for Chemical Bank.
“I’d watched this business at Lehman provide a service,” Schwarzman said. “It was nicely profitable and didn’t use a lot of capital. At Blackstone, we were trying to build a very broad and deep set of relationships with the people around the world who really mattered.” With Newman on board, Peterson provided a connection that proved crucial for credibility, and recruiting. Peterson, now 85, introduced the Blackstone restructuring group to Edward Finkelstein, who led the buyout of R. H. Macy & Co. Advising the company on its 1992 bankruptcy, Newman and Coleman faced off against creditors represented by Flip Huffard and Steven Zelin - - who would both go on to join the core of Blackstone’s team and become senior managing directors.
Dow, Xerox
That group has since advised clients including Dow Corning Corp. in 1995 following its bankruptcy, Xerox Corp. on its 2000 restructuring and Enron Corp. on its 2001 bankruptcy. In addition to the firm’s current gaming assignments, Blackstone also advised creditors of Station Casinos, which emerged from one of the largest casino bankruptcies in history last month.
Hired in January 2009, Blackstone advised Ford as it negotiated with the United Autoworkers to modify a 2007 collective-bargaining agreement and reduced borrowings through a debt exchange and tender offers. Ford was the only major U.S. automaker to avoid Chapter 11 and a taxpayer bailout.
It took the credit crisis, and assignments like Ford, to prove the value of Schwarzman and Peterson’s diversification strategy. While Blackstone’s private-equity and real-estate groups struggled in 2008 with a combined $1.2 billion in losses, the advisory unit turned a profit and was the biggest contributor to revenue, largely driven by restructuring.
‘Fee-Driven’
“The investing business is going to be closely tied to the equity markets,” said Roger Freeman, an analyst at Barclays Capital in New York who covers Blackstone. “Here you’ve got a fee-driven business that could be doing fine when the market is sideways or down.”
While Blackstone has solidified its role in the world of restructuring, it’s still a small corner in Schwarzman’s financial empire. Last year the advisory business, which includes restructuring and mergers advice, had a profit of $83.7 million, about a fifth of what Blackstone earned from private equity. And with Blackstone’s stock still trading at about half the 2007 IPO price, public shareholders see its fortunes as closely tied to real estate and private equity.
Being part of a larger shop, while protecting the group from downturns, also means additional baggage, including conflicts inherent in stitching together businesses with competing agendas and different access to information. The firm, like most on Wall Street, says it has policies to ensure that material non-public information stays that way.
Culture Gap
Coleman, who sits on the executive committee and joined Blackstone in 1992 after more than a decade at Citigroup, must also bridge the culture gap between investment bankers and corporate-workout experts.
“We work in a tough business, where people yell and scream at us all the time,” said Coleman, who favors French cuffs and Hermes ties. “In order to get a restructuring done, you have to have a lot of personality.”
That personality derives in part from his lieutenants’ backgrounds and styles. Zelin was born and raised in Brooklyn. He attended high school in Coney Island before the State University of New York at Albany as an undergraduate and New York University’s Stern school of business. He worked briefly for Newman at Ernst & Whinney. When Newman left for Blackstone, Zelin pressed him for a job.
Birthday Cards
“After years of sending cards and flowers on their birthdays, they finally hired me,” said Zelin, who’s worked on deals including Enron, Ford and AbitibiBowater Inc. “While all three of us have different backgrounds and attended different universities, we actually have a lot in common, which makes working together extremely enjoyable.”
Huffard grew up in Connecticut, and after earning an undergraduate degree from Harvard University and working at Smith Barney, he went back to run his family’s oyster and clam processing company. Upon graduating from Northwestern University’s Kellogg School with an MBA, he returned to Wall Street.
Huffard has worked on deals involving Tribune Co., Philadelphia’s newspapers and the restructuring of truck stop operator Flying J, where Blackstone was brought in 48 hours before the company filed for bankruptcy and the creditors ultimately got all of what they were owed.
“The rewards are similar to those of a doctor,” Huffard said. “Sometimes you manage to nurse really sick patients back to fiscal health and they go on to do great things.”
State Government
The group is focused on delivering revenue and profit from pockets of distress like gambling, even as the economic recovery diminishes potential restructuring business. Huffard says the group has resisted specializing to be responsive to whatever sector needs working out -- and the group is now making inroads with potential clients beyond corporate workouts, such as state and local governments.
“Any question about how restructuring fits into Blackstone was answered in the last two years,” Coleman said. “We made a big difference. At the end of the day we’re all shareholders.”
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