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Blackstone's Almost Warren Buffett-Like Stake in Crocs

Updated from 9:20 a.m. ET to include analyst comments and closing share prices

NEW YORK (TheStreet) -- The Blackstone Group's (BX) private equity arm has found a deal in struggling footwear manufacturer Crocs (CROX - Get Report) that is reminiscent of the "heads I win and tails you lose"-type bets that are a staple of Warren Buffett's investing playbook.

Blackstone Group said on Sunday it would invest $200 million in Crocs' convertible preferred stock, as the company works to replace its CEO John McCarvel and buy back $350 million in the company's common shares. The preferred stake will carry a 6% cash dividend and is convertible to stock at $14.50 a share, an about 9% premium to the closing price of Crocs shares on Friday.

"We will add $200 million of long-term non-publicly traded preferred equity and the stock repurchase program, when completed, will reduce our publicly traded common stock float by approximately 30% (at today's market price), while maintaining a strong net cash position on our balance sheet. We expect these initiatives to reduce volatility in both our common stock price and our shareholder base and provide a strong foundation to unlock long-term value for our shareholders," Jeff Lasher, Crocs chief financial officer, said in a statement.

Crocs expects to begin its share repurchase in the first quarter of 2014 and said the company would be "patient, methodical and opportunistic" in buying back its stock.

On the surface, Blackstone's deal looks similar to the type of preferred investments that Warren Buffett of Berkshire Hathaway (BRK.A) might consider. Buffett after all made solid investment returns from multi-billion preferred stock investments in Goldman Sachs (GS), General Electric (GE) and Bank of America (BAC) during the financial crisis.

At Berkshire's 2012 annual shareholder meeting Buffett also said that providing emergency capital to struggling corporations will remain a staple of Berkshire Hathaway's investing playbook long after he cedes the reins of the company to a successor. 

But Blackstone's preferred stake in Crocs and similar investments from PE-industry competitors such as Oaktree Capital Management (OAK) and KKR & Co. (KKR) indicate that the field for providing capital to companies in need may be getting a bit crowded. Whether it is Blackstone and Crocs, Oaktree's $225 million May 2012 stake in Diamond Foods (DMND - Get Report) as the firm was working to restate its earnings or KKR's recent $500 million investment in Haier as it works to expand in the U.S. -- all appear similar to Buffett's investing vein.

Blackstone will be able to convert its convertible preferred stake into common shares at any time after three years from its initial investment, so long as Crocs' common stock trades above $29 a share for 20 consecutive trading days. In the meantime, the company will collect a dividend that carries a higher yield than most new issues of corporate debt in today's low-interest rate environment.

There is an extra kicker. Because Crocs will be buying back its stock shares starting in the first quarter, Blackstone may eventually get an extra discount on any eventual common stock investment.

Blackstone's $200 million convertible preferred investment at a conversion price of $14.50 would represent about 13% of Crocs fully diluted common shares at current prices. However, if one assumes the company was able to buy back shares at advantageous prices, that eventual stock holding could be far greater.

Were Crocs to execute all of its $350 million buyback authorization at current trading prices, the company would repurchase nearly 25 million of its common shares or about 30% of its outstanding stock. If Crocs shares recovered in years following the repurchase and Blackstone was able to convert its preferred shares, as the company appears it intends to do, its common stock interest would grow to nearly 20%. And that would come after years of collecting 6% quarterly dividends.

Even though Blackstone is taking a convertible preferred stake, the PE giant will also gain two seats to Crocs board of directors, an indication that the firm expects to eventually be a voting shareholder. It also appears that Crocs will rely on Blackstone's private equity group to help it uncover a path towards profitability and a strong CEO successor to replace Mr. McCarvel.

"[We] believe that a regime change and a shift of balance of power in the Board (with Blackstone having 2 board seats with veto power and presumably, a significant say regarding a new potential CEO) will be beneficial for the business. We believe the involvement of Blackstone will also allow the company to attract a different type of candidate to the position. We suspect that Blackstone may have already identified several candidates and we do not expect this to be a protracted search," Corinna Freedman, a Wedbush Securities analyst said in a Monday client note.

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