IPO Preview: TriNet Group

| About: TriNet Group, (TNET)


Top line revenue growth appears to have come from acquisitions.

The new IPO investor will suffer an immediate per share dilution of -$23.29 compared to an IPO price range mid-point of $16.

TNET is basically a ‘rent a body’ shop specializing in human resources.

Based in San Leandro, CA, TriNet Group (NYSE:TNET) scheduled a $240 million IPO on the NYSE with a market capitalization of $1.1 billion at a price range midpoint of $16 for Thursday, March 27, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents
Manager, Joint managers: J.P. Morgan, Morgan Stanley, Deutsche Bank
Co-Managers: Jefferies & Co., Stifel, William Blair

End of lockup (180 days): Tuesday, September 23, 2014

End of 40-day quiet period: Tuesday, May 6, 2014

TNET has an accumulated deficit of -$467 million, which is hard to swallow on an IPO.

The new IPO investor will suffer an immediate per share dilution of -$23.29 compared to an IPO price range mid-point of $16.

Plus TNET has sucked out $433 million in dividends since January, 2012.

The top line revenue growth appears to have come from acquisitions, rather than internal growth, and the P/E ratio based on reported earnings for 2013 is 83, very high for a 'rent a body' type operation.

Income for 2013 vs 2012 declined -59%, although this confusing statement appeared as a financial footnote: "Income tax impact of pre-tax adjustments at the effective tax rate", but that statement is not explained.


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The TNET rating is positive. In spite of financial issues, this market likes companies who are big players in their sectors.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

TNET is a leading provider of a comprehensive human resources solution for small to medium-sized businesses, or SMBs. TNET provides Work Site Employees (WSE) to its clients.

TNET is basically a 'rent a body' shop specializing in human resources.

Benefits according to TNET
It enhances business productivity by enabling its clients to outsource their HR function to one strategic partner and allowing them to focus on operating and growing their core businesses.

TNET's HR solution includes services such as payroll processing, human capital consulting, employment law compliance and employee benefits, including health insurance, retirement plans and workers' compensation insurance.

Services are delivered by TNET's expert team of HR professionals and enabled by its proprietary, cloud-based technology platform, which allows its clients and their employees to efficiently conduct their HR transactions anytime and anywhere.

TNET believes it is a leader in the industry due to its size, its presence in the United States and Canada and the number of clients and employees that it serves.

Growth by Acquisitions - this is how TNET grew top line revenue.
Recent acquisitions are listed below:

In July 2013, TNET acquired Ambrose Employer Group, LLC, with 13,000 WSEs, approximately 1,000 clients and 12 sales representatives.

In October 2012, TNET acquired South Carolina-based SOI Holdings, Inc., with 66,000 WSEs, approximately 1,500 clients and 92 sales representatives.

In May 2012, TNET acquired Los Angeles-based technology company App7, Inc., which does business under the name of, ExpenseCloud, which enabled TNET to enhance its technology platform with additional expense management capabilities.

In April 2012, TNET acquired Oklahoma-based 210 Park Avenue Holding, Inc., with 500 clients and 8 sales representatives.

In June 2009, TNET acquired Florida-based Gevity HR Inc., with approximately 92,000 WSEs and approximately 6,000 clients. Following the acquisition of Gevity, TNET elected to change the pricing terms with certain of Gevity's clients, terminate Gevity's relationships with certain of its clients, significantly restructure Gevity's and TNET's combined sales forces and migrate all of Gevity's WSEs to TNET's technology platform. As a result of these actions, revenues fell short of expectations in 2010 and declined in 2011, and TNET incurred restructuring charges of $6.2 million, $5.9 million and $2.4 million in the years ended December 31, 2009, 2010 and 2011, respectively.

Co-employment model
TNET utilizes a co-employment model pursuant to which both it and its clients become employers of its clients' employees, which TNET refers to as worksite employees, or WSEs.

This model affords TNET a close and embedded relationship with its clients and their employees.

Under the co-employment model, employment-related liabilities are contractually allocated between TNET and its clients.

TNET assumes responsibility for, and manage the risks associated with, each client's employee payroll obligations, including the liability for payment of salaries and wages to each client employee, the payment of payroll taxes and, at the client's option, responsibility for providing group health, welfare, workers' compensation and retirement benefits to such individuals.

Unlike a payroll service provider, TNET issues each WSE a payroll check drawn on its bank accounts and contract with insurance carriers to provide health and workers' compensation insurance to WSEs under TriNet's name.

TNET serves thousands of clients in specific industry vertical markets, including technology, life sciences, property management, professional services, banking and financial services, retail, manufacturing and hospitality services, as well as non-profit entities.

As of December 31, 2013, TNET served over 8,900 clients in 47 states, the District of Columbia and Canada and co-employed 231,000 WSEs. In 2013, TNET processed over $17 billion in payroll and payroll tax payments for its clients.

Dividend Policy
Since January, 2012 TNET has paid $433 million in dividends, shoving the company into a negative price-to-book ratio. This is a red flag.

Intellectual Property
TNET does not currently have any registered patents or pending patent applications covering any of its technology.

TNET owns registered trademarks in the United States and Canada that have various expiration dates unless renewed through customary processes. TNET's trademark registrations may be unenforceable or ineffective in protecting its trademarks.

TNET is one of only four PEOs (professional employer organization) accredited by the Employer Services Assurance Corporation that offers services in all 50 states and believes that its is one of the largest PEOs in the industry.

TNET's competitors include large professional employer organizations, such as the TotalSource unit of Automatic Data Processing, Inc. and Insperity, Inc., as well as specialized and small professional employer organization service providers.

5% stockholders
Funds Affiliated with General Atlantic 71.4%
Martin Babinec 10.2%

Use of proceeds
TNET expects to net $218 million from its IPO. Proceeds are allocated as follows:

to repay $215 million of indebtedness outstanding under TNET's credit facilities, increase TNET's equity capitalization and financial flexibility, increase its visibility in the marketplace and create a public market for its common stock.

for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures.

Disclaimer: This TNET IPO report is based on a reading and analysis of TNET's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.