EXCLUSIVE-KKR hires adviser for $600 mln Northgate unit sale-sources

(Adds sale options for Northgate NGA)

By Pamela Barbaglia and Anjuli Davies

LONDON, Aug 19 (Reuters) - U.S. private equity firm KKR has appointed Rothschild to sell the public sector division of its software firm Northgate Information Solutions, two sources familiar with the situation said.

The company will be auctioned to private equity firms later this year and could be worth around $600 million, the sources said.

Northgate Public Services (NPS), whose clients include Britain's police, local government agencies and the National Health Service, is the smaller of two divisions within Northgate Information Solutions.

The other is NGA Human Resources (formerly known as NorthgateArinso) which focuses on human resources software for clients across Europe, the United States and Asia.

The sale of NPS comes after its main rival in Britain, Civica, was acquired by Canada's OMERS Private Equity for an enterprise value of 390 million pounds ($648 million) in 2013, representing slightly less than 10 times its core earnings, one of the sources said.

A combination of Civica and NPS was initially explored last year when Civica's former sponsor 3i hired Rothschild to find a new owner.

KKR, which was in turn advised by JPMorgan (LSE: JPIU.L - news) , was interested in merging the two companies under a new private equity investor but talks fell through, partly because such a combination would have triggered an antitrust review, said the second source who can't be named because the matter is confidential.

PRIVATE EQUITY INTEREST

While a combination with Civica remains a possibility, other private equity funds active in the sector have already expressed interest in NPS, the first source said, adding that only a "handful of industry players" would be well-placed for a tie-up.

NPS expects to generate turnover of 195 million pounds ($324.4 million) in the financial year ending April 2015 with core earnings of 50 million pounds, the first source said.

That compares with revenue of 168.9 million pounds in the 2013 financial year, up 5.8 percent from the year before according to the annual report of parent company Northgate Information Solutions. Adjusted EBITDA from continuing operations grew 5.4 percent to 39.3 million pounds in 2013.

NPS aims to increase its revenue growth pace to an annual 7-8 percent, the first source said.

NEXT STEP

Two bankers familiar with the sector said KKR was also examining a combination of Northgate (LSE: NTG.L - news) 's human resources software unit NGA with U.S. rival Ceridian. Ceridian is active in the UK, where it provides payroll software.

However, the first source said there was more work to be done on NGA before it was ready to sell and the disposal of the other business was KKR's main priority.

The NGA division is moving from a software license-fee sales model to a cloud-based software-as-a-service (SaaS) model and needs to revive growth after its revenues declined in recent years, the sources said.

NGA's clients include Irish airline Aer Lingus (Other OTC: AELGF - news) and Italian tyre maker Pirelli, and it is expanding into new markets such as China.

The division reported revenue of 523 million pounds for its financial year ended April 2013, down from 549.8 million pounds the previous year. Adjusted EBITDA rose 6.3 percent to 104.4 million pounds.

Northgate, KKR and Rothschild declined to comment. JPMorgan and Ceridian were not immediately available for comment.

KKR took Northgate Information Solutions private in 2008, in a deal valuing the company at 593 million pounds. It subsequently sold its managed services division to outsourcing group Capita (LSE: CPI.L - news) for 65 million pounds last year.

($1 = 1.0000 US dollars) ($1 = 0.6011 British pounds) (Additional Reporting By Eric Auchard. Editing by Erica Billingham)