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With investors, Blackstone IPO is hot, hot

But critics are growing more vocal, and looming 35-per-cent corporate tax rate could sideswipe shareholders down road

With files from Associated Press and Bloomberg News

WASHINGTON -- Undeterred by Congressional threats and unrelenting controversy, investors are scrambling to buy a piece of U.S. hedge fund Blackstone Group LP at the lofty price of $31 (U.S.) a share.

New York-based Blackstone set the price yesterday for shares in its $4.13-billion initial public offering - the largest on Wall Street in five years - amid unexpectedly heavy demand from overseas investors.

Demand for the 133 million shares is running at six or seven times the number available, analysts said. And that's in spite of an 11th-hour appeal by key members of Congress, who have asked the U.S. Securities and Exchange Commission to delay the IPO until hearings can be held.

The delay comes at the request of Henry Waxman, chairman of the House committee on oversight and government reform, who said the IPO exposes investors to "new and undisclosed risks," while stripping them of necessary protections.

"For this reason, we urge you to refrain from accelerating the IPO until Congress has had a chance to hold hearings on this matter," Mr. Waxman wrote in a letter to SEC chairman Christopher Cox.

Some members of Congress have also warned of possible national security risks because Blackstone plans to sell a $3.75-billion stake in the company to the Chinese government. "This is a national security issue," said Virginia Democratic Senator Jim Webb. "We need to slow down and take a look at it."

The deal will be closely watched by other buyout funds thinking about their own offerings. The Wall Street Journal reported yesterday that Kohlberg Kravis Roberts & Co., is planning an IPO, with CNBC TV reporting the firm has already hired underwriters. Washington D.C.-based Carlyle Group, and a list of other big private equity players are also said to be considering IPOs.

Meanwhile, the authors of a federal bill that would slap Blackstone with a hefty 35-per-cent corporate tax rate are talking about shortening a five-year phase-in for the legislation. Under legislation introduced in the U.S. Senate, Blackstone would be hit with the standard corporate tax rate of 35 per cent, instead of the partnership rate of 15 per cent, starting in 2012.

But Montana Senator Max Baucus said he's now considering redrafting the bill to shorten the phase-in because of growing public outrage over the IPO. The uncertainty could saddle shareholders with a large tax liability down the road.

Controversy has swirled around the Blackstone IPO ever since the company disclosed that its founders and top executives stand to pocket billions of dollars selling their personal stakes in the company. Chairman Stephen Schwarzman, for example, could wind up with a stake worth nearly $7.7-billion.

"Scrutiny was inevitable since this is the first time a big brand name private equity firm is going public, and disclosing how the industry really works," said Peter Shabecoff, founding partner of Stamford, Conn.-based private equity firm Atlantic Street Capital Management.

"But they have the scope and brand name to be successful, and that's what people are buying into."

The IPO represents roughly 10 per cent of the New York investment firm, and puts the total value of the company at roughly $40-billion.

Blackstone, the second largest buyout fund in the United States, controls companies such as Universal Studios Florida and real estate giant Equity Office Properties Trust. Its IPO would surpass the initial offerings of Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. as one of the biggest in Wall Street's history.

However, unlike investors in those vaunted firms, those buying into Blackstone only get a piece of its management division -- which carries little voting rights and no direct connection to the portfolio of companies the firm operates.

Also yesterday, civil rights activist Jesse Jackson complained that Wall Street isn't giving minority-owned firms a fair crack at deals such as the Blackstone IPO. way."

Breaking the top 10

Blackstone Group LP's highly anticipated initial public offering raised $4.13-billion (U.S.). A ranking of the largest U.S. IPOs, before today's events:

1. AT&T Wireless Group

Price: $10.6-billion

IPO Date: April 26, 2000

2. Kraft Foods

Price: $8.7-billion

IPO Date: June 12, 2001

3. United Parcel Service

Price: $5.5-billion

IPO Date: Nov. 9, 1999

4. CIT Group

Price: $4.6-billion

IPO Date: July 1, 2002

5. Conoco

Price: $4.4-billion

IPO Date: Oct. 21, 1998

6. Travelers Property Casualty

Price: $3.9-billion

IPO Date: March 21, 2002

7. Goldman Sachs Group

Price: $3.7-billion

IPO Date: May 3, 1999

8. Agere Systems

Price: $3.6-billion

IPO Date: March 27, 2001

9. Charter Communications

Price: $3.2-billion

IPO Date: Nov. 8, 1999

10. Lucent Technologies

Price: $3-billion

IPO Date: April 2, 1996

Associated Press, U.S. dollars

© 2007 The Globe and Mail. All rights reserved.

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