BREAKINGVIEWS-Software deal models AI buyout options

By Pranav Kiran

TORONTO, Jan 7 (Reuters Breakingviews) - Private equity can afford to buy some options on artificial intelligence-driven disruption. European investor Hg Capital on Tuesday agreed to take software company OneStream private in a $6.4 billion deal. Just based on current expectations for the business, the transaction promises a hefty return. Cost-cuts and completing the subscription seller’s AI makeover offer further upside. If the upgrade doesn’t take, though, cashflow in the interim should make for a nice safety cushion.

OneStream, which develops software for financial statements, planning and budgeting, was taken public only two years ago by KKR. Its market value tumbled 30% between its debut and November, when Reuters reported that it was considering a sale. It’s indicative of the general malaise among investors in technology firms that depend on subscription models, known as software-as-a-service. Fears that they could be displaced by ever-more-capable AI models, as well as the long shadow cast by extraordinary growth among tech giants like Alphabet and Nvidia, have left industry valuations ailing.

After subtracting OneStream’s net debt from the purchase price, an enterprise value of $5.7 billion works out to about 8 times estimated revenue for the year ending December 2026, according to Visible Alpha data. Assume that Hg nabs five times the company’s EBITDA in debt to fund the purchase, and its rate of return could top 25% if it exits at the same multiple in five years’ time. This assumes that sales grow at about 20% annually while profitability expands, as analysts currently predict.

However, finding a future buyer for OneStream means surviving the AI era. For any SaaS company, displacement by machine learning-powered tools could swiftly curtail business in a few years’ time. The industry is already predicted to wane: research by KeyBanc analysts of nearly two dozen companies estimates that annual free cash flow growth could drop to below 5% from 14% today. That’s before factoring in AI disruption.

Buyout firms like Hg are trying to get ahead of the shift. The firm launched an incubator to help portfolio companies churn out AI products. Going private also lets a company make changes that might be too painful in public, as many did during the prior transition from perpetual license sales to subscriptions.

There’s a chance it still might not work. If a buyout shop sees the writing on the wall, decent cashflow expected in the near-term could fund dividends, helping returns. The pace of such deals reached its highest rate since the global financial crisis in 2025, according to PitchBook data. For those willing to take the risk, there’s a little bit of insurance on the side.

CONTEXT NEWS

Buyout firm Hg Capital said on January 6 that it had agreed to acquire financial software developer OneStream in an all-cash deal worth $6.4 billion. Private equity firm General Atlantic and investment firm Tidemark will become minority investors in the company.

Shareholders will receive $24 a share in cash, representing a 31% premium to OneStream's closing price on January 5.

JPMorgan is acting as lead financial advisor to OneStream, with Centerview Partners also providing advice. Goldman Sachs advised Hg Capital.