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Blackstone Forays into Casino Biz

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The Blackstone Group L.P.’s (BX - Free Report) fund, Blackstone Real Estate Partners VII has entered into an agreement with Deutsche Bank AG (DB - Free Report) , under which it will acquire The Cosmopolitan of Las Vegas from the latter. Valued at $1.73 billion in cash, the transaction is subject to regulatory approvals.

Blackstone’s stock price declined following the news release in the first half of the trading session on Thursday. Nevertheless, later in the day, shares regained some lost value to close at $29.07, which was still nearly 2% below the prior-day closing figure.

The overall subdued market sentiment was the reason behind the negative stock price movement. Further, the acquisition of the aforementioned property could be another contributing factor resulting in the bearish stance.

The Cosmopolitan was acquired by Deutsche Bank in 2008, as the casino had defaulted on the loans it had borrowed from the German bank. Despite spending nearly $4 billion on the property, it remained a loss-making unit for Deutsche Bank.

Though the casino and resort business is no doubt recovering in the Vegas strip, overall growth remains sluggish. Further, no radical improvement is anticipated in the near term. Therefore, the decision to acquire the troubled property might actually weigh on Blackstone’s top line in the quarters to follow.

Moreover, though the private equity giant has been actively investing in hotels, it is relatively unfamiliar to casino business. While exploring new profit making avenues, Blackstone also increases the risk profile of its business.

Despite all the odds, the performance of Cosmopolitan reflects signs of improvement with net revenues reaching a new high of $652.5 million in 2013. This trend continued in first-quarter 2014 as well, wherein net revenues increased 14.6% year over year to $182.9 million.

Therefore, with overall economic recovery we expect the forenamed deal to support Blackstone’s long-term growth. We should not forget that the company boasts of a growth story driven by meaningful investments and good returns.

Currently, Blackstone carries a Zacks Rank #3 (Hold). Better-ranked investment managers include Affiliated Managers Group Inc. (AMG - Free Report) and Woori Finance Holdings Co., Ltd. (WF - Free Report) . Both the stocks sport a Zacks Rank #1 (Strong Buy).

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