Thoma Bravo to exit Blue Coat in $2.4 bln sale to Bain

On Tuesday, Bain announced it would buy Blue Coat in a deal valued at roughly $2.4 billion, including debt. Jeffries Finance is providing financing. Sellers include Thoma Bravo and the Ontario Teachers’ Pension Plan. Blue Coat’s management is also rolling a stake into the new company, a source said.

The transaction is expected to close in the first half of the year, according to a statement. Sunnyvale, Calif.-based Blue Coat, a provider of internet security and wide area network acceleration services, employs about 1,500 people globally. No job cuts or management changes are expected, said David Humphrey, a Bain managing director.

Bain, which is buying all of Blue Coat, is expected to kick in a “significant” equity check, a source said. The Blue Coat investment is coming from two funds: Bain’s latest flagship fund, which closed on $7.3 billion in April 2014, and the firm’s fourth Europe fund, E-IV, which collected 3.5 billion euros (US$4.8 billion) last year.

Blue Coat received an offer from a strategic buyer roughly nine months ago, but the deal didn’t pan out, two sources said. In January, Thoma Bravo reached out to a limited number of parties with experience in the space. That’s when Bain became involved, the first source said.

Cyber threats

Bain has experience with enterprise software. Bain and Golden Gate Capital led an investor group to buy BMC Software in 2013 for $6.9 billion. The deal crystallized Bain’s interest in infrastructure software, Humphrey said.

However, it was the hacks of Sony PicturesJPMorgan Chase and Target that illustrated the need for cyber security software. “Recent high-profile data breaches illustrate the growing importance of cyber security, which is an increasingly critical issue for enterprises and governments worldwide,” Humphrey said. “Blue Coat is a really important company in the land of cyber security.”

As the second private equity owner, Bain still has upside, Humphrey said. The firm plans to grow Blue Coat, introduce new products, take part in M&A and hopefully go public sometime in the future. “We think there are profound macro tailwinds for Blue Coat,” Humphrey said.

Ken Marlin, founder and managing partner of Marlin & Associates, a New York investment bank, said while Fortune 500 companies have taken the cyber threat seriously, many other companies have not installed robust systems. “Hundreds of thousands of medium-sized businesses need to get more serious about protection against cyber attacks,” he said. 

At $2.4 billion, Bain is paying a high price for Blue Coat, but because of the growth potential, the Blue Coat investment should produce a good return for Bain’s investors, Marlin said.

An exit

The deal represents a three-year hold for Thoma Bravo, which closed its $1.3 billion buy of Blue Coat in February 2012. Thoma Bravo invested $520.5 million equity as part of the deal, according to a Moody’s Investors Service note from that time.

Thoma Bravo got back roughly half in 2013 when Blue Coat issued a $330 million loan to fund a dividend to its financial sponsors.

Paul Crisci of Jefferies advised Bain, while Goldman, Sachs & Co. provided financial advice to Blue Coat.

Executives for Thoma Bravo declined comment. Blue Coat could not immediately be reached for comment.