Blackstone and GIC are in advanced talks to buy minority stakes in human resources software company Kronos at $4.5 billion, including debt

Blackstone, GIC nearing Kronos minority stake deal: sources

1:20am EST

By Nadia Damouni and Greg Roumeliotis

New York (Reuters) – Private equity firm Blackstone Group LP and Singapore sovereign wealth fund GIC are in advanced talks to buy minority stakes in Kronos Inc that could value the human resources software company at around $4.5 billion, including debt, three people familiar with the matter said.

Blackstone and GIC plan to collectively invest $750 million for just over 40 percent of the equity in Kronos, one of the sources said. A deal could be announced as early as this week, that person added, cautioning that some details were still being negotiated.

Private equity firms Hellman & Friedman LLC and JMI Equity explored an outright sale of Kronos but rejected takeover bids as high as $4.6 billion earlier this month due to disagreements over valuation, people familiar with the matter said last week.

By not giving up control of the company, Hellman & Friedman was willing to accept a lower valuation for Kronos because the new investors no longer had to pay a “control” premium, the sources said.

The sources asked not to be identified because the negotiations are confidential. Kronos declined to comment while Hellman & Friedman, JMI Equity, Blackstone and GIC could not be immediately reached for comment.

Chelmsford, Massachusetts-based Kronos provides workforce management for companies and organizations in more than 100 countries.

Human resources technology is in strong demand among businesses, which are increasingly turning to cloud computing, which allows them to access data from remote servers that are faster and cheaper than traditional in-house infrastructure.

Workday Inc (WDAY.N: Quote, Profile, Research, Stock Buzz), a Silicon Valley startup that offers Web-based human resources software, had a blockbuster initial public offering in October 2012 and its shares have almost doubled in value the last 12 months amid strong earnings.

Hellman & Friedman and JMI Equity, which took Kronos private for $1.8 billion in 2007, have taken advantage of Kronos’ strong cash flow to draw more than $1.5 billion in dividends from the company.

They committed $698 million as equity to the 2007 deal along with the company’s management. Including the dividends they have taken out, the potential deal with Blackstone and GIC values Kronos at around 5 times their original investment, one of the sources said.

Most recently in November, they had the company borrow to pay themselves a $490 million dividend, according to Moody’s Investors Service Inc.

Kronos has a large and diversified base of enterprise clients and its recurring maintenance and subscription model has contributed to sustained growth in its revenue and earnings before interest, tax, depreciation and amortization (EBITDA), Moody’s commented in November.

Kronos has EBITDA of around $350 million and is being advised by Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) on the potential sale, people familiar with the matter said in December.

Hellman & Friedman and smaller buyout firm JMI Equity also teamed up late last year to buy insurance software provider Applied Systems from Bain Capital LLC for $1.8 billion. In 2010, they sold insurance software firm Vertafore to TPG Capital LP for $1.4 billion.

 

Blackstone, GIC Invest in Kronos

Pair to Invest $750 Million for Roughly 44%; Dividend Recapitalization to Raise Debt

MIKE SPECTOR And GILLIAN TAN

Feb. 20, 2014 12:47 a.m. ET

A team of Blackstone Group LP and GIC Private Ltd. reached a deal to take a minority stake in Kronos Inc. that values the human-resources software company at around $4.5 billion, including debt, said people close to the negotiations.

Blackstone, the world’s largest private-equity firm, and GIC, a sovereign-wealth fund owned by the Singapore government, are together investing about $750 million in Kronos, the people said. That will give the pair a roughly 44% stake in Kronos, one of the people said. The deal values Kronos equity at about $1.7 billion.

The deal could be announced as soon as Thursday, the people said. Kronos Chief Executive Aron Ain is expected to remain at the company’s helm after the deal closes, which is expected by mid-year, the people said.

The minority investment will coincide with a so-called dividend recapitalization transaction, which will lift Kronos’s debt-to-Ebitda ratio to above eight times, some of the people said.

That could cause scrutiny from regulators who have been cracking down on banks that underwrite loans for borrowers with leverage ratios of more than six times in most industries.

The recapitalization will result in Kronos having about $2.8 billion in debt, said one person familiar with the matter.

Kronos, based in Chelmsford, Mass., helps companies manage payroll and hiring systems through cloud-based technology. It employs more than 3,000 people.

“Management is very excited to welcome Blackstone and GIC as investors in Kronos,” Mr. Ain said in an interview. “They’re global organizations that give us reach in areas that are strategic to us,” he said.

Hellman & Friedman LLC, which will remain the company’s majority investor, and JMI Equity took Kronos private in 2007 in a deal valued at $1.8 billion.

The firms last year began looking for a buyer for the business. Kronos’s annual sales are approaching $1 billion and its earnings before interest, taxes, depreciation and amortization have more than doubled in the past seven years, according to one of the people.

The cash from the deal is expected to be used by the company to invest in its continued growth.

Blackstone and GIC prevailed over a handful of other buyout firms pursuing Kronos over the past few months. Kronos rejected bids to buy the company outright earlier this month, dissatisfied with the prices offered, a person familiar with the process said. Kronos then pivoted to negotiating with investors to take a minority stake the company.

Kronos wasn’t comfortable with a full takeover at the valuation that the minority investment sets for the company, one of the people said.

As for the debt, banks may justify their participation in the deal by citing the company’s highly predictable and recurring revenue, which will enable it to pay off debt quickly, according to one of the people. In addition, Kronos’s capital expenditures are small, giving it additional breathing room to handle debt, another person said.

As of November last year, Kronos had about $2.2 billion in debt outstanding, or a debt-to-Ebitda ratio of 7.3 times, according to Moody’s Investors Service. At the time, the company issued new debt through a dividend recapitalization that resulted in a payout of about $413 million to its private-equity owners.

In October 2012 and December 2011, Kronos undertook two dividend recapitalization deals that funded separate dividends to its owners totaling more than $900 million, according to S&P Capital IQ LCD.