NEW YORK (Reuters) - Blackstone Group LP (BX.N) said on Thursday that it would buy hedge fund GSO Capital Partners LP for up to $930 million, and the private equity firm announced a $500 million stock buyback plan.

Blackstone said it would pay $620 million in cash and stock initially, plus up to $310 million over the next five years if GSO hits specified earnings targets.

The buyout firm said it planned to repurchase enough units to offset the issuance of those it uses to buy GSO. Blackstone shares are called units because of the company's partnership structure.

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"We believe that our common units are undervalued and we therefore intend to offset the issuance of holdings units to the owners of GSO by repurchasing the same amount of units from existing holders," Blackstone President Hamilton James said in a statement.

Blackstone went public in June at $31 a share. The stock hit a high of $38 last year, but has since declined more than 50 percent, closing on Thursday at $18.10.

GSO, which manages about $10 billion of assets, is in negotiations to buy packaged ice maker Reddy Ice Holdings Inc

FRZ.N.

The hedge fund sold a minority stake in itself to Merrill Lynch & Co MER.N last May.

Combining GSO's operations with Blackstone's corporate debt investing business will leave Blackstone managing more than $21 billion of assets. Chief Executive Stephen Schwarzman said dislocation in the credit markets makes this "an ideal time" to expand this business.

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(Reporting by Joseph A. Giannone and Megan Davies; Editing by Lisa Von Ahn)