Quick Pitch: Kelly Services (KELYA)

Potential Privatization: 30%+ Upside (at $12.96)

Kelly Services is one of the oldest staffing companies in the US, and basically invented the temporary work industry. The staffing sector as a whole has been stuck in a messy downturn for a while. But Kelly Services has a clean event-driven angle going for it: recent events suggest that the company is likely to be taken private by its new controlling shareholder, PE firm Hunt Companies, which has called for the formation of a special committee to evaluate a potential transaction. Any deal would have to come at a premium to current levels in order to win minority shareholder approval.

Until this year, Kelly Services used to be controlled by the founding family through voting stock. The company has two share classes: non-voting Class A (KELYA) and voting Class B (KELYB). The founding family owned 92% of Class B, giving it total say over the company while only just holding a 10% economic interest.

In January, the family sold its entire stake to Hunt Companies ($36bn in AUM). This was a pretty unusual transaction for a few reasons.

• The control premium was enormous. Hunt paid $34.88/share, when at the time both classes of shares were trading at only $9. Even in biopharma space, you rarely see premiums of this size. The price gap most probably can be attributed to control premium, as the deal let Hunt take control of Kelly while spending very little cash in acquiring just 10% of the economic interest in the company.
• The deal included a $15.2m contingent payment to the family if Kelly’s market cap reaches $1.2bn in four years. That’s 2.5x higher than the current market cap of $480m. This payment would raise the effective price Hunt paid for the controlling stake from $34.88 to $39.87/share. That is unusual, especially given how large the control premium already was. The fact that the founding family negotiated for this upside at all says something about how much potential value Kelly could really have from here.
• The founding family anticipated that Hunt would eventually want to take Kelly private and negotiated protections for minority shareholders. Any privatization transaction within the next three years will need approval from disinterested shareholders. For the first year, Hunt also committed not to initiate or propose a privatization without a prior written invitation from the board’s special committee.
• The most important protection is that for three years from the deal’s close, Class A holders will vote on any privatization at one vote per share, the same as Class B holders. Disinterested shareholders are defined as both Class A and Class B voting together as a single class. So for those three years, of which two and a half remain, a privatization will need support from a majority of all outstanding shares, Class A and Class B combined, excluding Hunt’s own stake.

In the case of a controlling stockholder transaction constituting a going private transaction, such controlling stockholder transaction is approved in the manner described in subsection (c)(1) of DGCL 144, provided, however, that, solely for purposes of this Agreement, references in DGCL 144 to “disinterested stockholders” shall be deemed to refer to the holders of shares of Class A Common Stock and holders of shares of Class B Common Stock, voting together as a single class, with each holder thereof entitled to one vote per share, other than stockholders that have a material interest in the act or transaction at issue or have a material relationship with Hunt and its Affiliates or any other person that has a material interest in the act or transaction.

After acquiring the controlling stake, Hunt moved quickly to overhaul Kelly’s board. Seven of the current 11 directors joined after Hunt gained control. Christopher Hunt, CEO of Hunt Companies, became Kelly’s chairman. On May 19, he wrote a letter asking the board to form a special committee to discuss a potential transaction:

Hunt is requesting that the Board form a special committee of independent and disinterested directors, fully empowered to retain its own independent legal and financial advisors, so that the company may be prepared to discuss and evaluate new potential opportunities for Kelly involving Hunt and its affiliates if and when presented, without delay. We believe establishing such a committee reflects our commitment to sound governance and transparency, and will help ensure that any potential opportunities are evaluated thoroughly and in the best interests of all stakeholders. We want to emphasize that any potential transaction would be pursued only in accordance with the terms of the Letter Agreement, dated January 30, 2026, by and between Kelly and HEO.

All of this suggests that Hunt is determined to move fast, and there is a real chance of an offer in the near term. Despite that, the market appears to be sleeping on the opportunity, at least when it comes to Class A KELYA shares. Although KELYA has already run up quite a bit since January and May, that seems to be driven by the broader industry move, rather than any specific effects of the pending potential privatization.

However, KELYB shares tell a different story. Historically, KELYB and KELYA traded closely in line with each other, probably because KELYB’s voting rights are essentially worthless outside the controlling block. But the two share classes have diverged completely since Hunt took control in January. KELYB has run up 160% and now trades at $23/share, while KELYA is up only 41%, at $13/share. It is worth noting that KELYB’s trading liquidity is quite thin, which could explain part of the divergence, though probably not all of it, since the two classes traded in line for years despite an even larger difference in liquidity.

Part of this price gap that opened up since January might be due to the market not fully grasping the Class A protections set up by Kelly’s old board. Those details, including voting equalization for both classes on privatization matters, weren’t properly explained in the press releases. Instead, they were buried in the legal documents. So I wouldn’t be surprised if the market has largely missed this, pricing the two classes as if the KELYA vote won’t matter and assuming Hunt can somehow screw Class A holders with a lower offer than what Class B gets. That’s clearly not the case. KELYA holders make up the absolute majority of disinterested shareholders, with 31.4m Class A shares outstanding versus just 0.3m Class B shares not owned by Hunt. The PE firm has no way to get away with paying KELYA less, as disinterested shareholders would simply vote down the proposal.

So the opportunity in KELYA looks pretty interesting right now.

To quickly sum up the whole setup:

• Hunt clearly sees a lot of value in Kelly, and has paid a large control premium for it.
• Recent communication from Hunt signals intent to move fast toward privatization.
• Any privatization will need approval from combined KELYA and KELYB minority shareholders.
• Unlike Class B shares, KELYA so far reflects none of the takeover optionality, with the stock simply moving in line with peers this year.
• A privatization offer will have to come well above current KELYA prices to have any real chance of success.

The downside on KELYA shares seems fairly well protected in the near term in case the deal doesn’t happen. The unaffected price (from either January or May) is no longer relevant, given that peers and the industry as a whole have moved up. The main risks are an uncertain timeline, industry volatility, and business performance exposure. But even with that, the setup seems quite interesting.

As for the valuation support, it’s difficult to pinpoint something with confidence, as Kelly’s historical financials are quite messy and have been distorted by lots of M&A, divestments, segment reshuffling, big impairments on recent acquisitions, etc. It’s hard to understand what the actual cash-generating power of the company is or has been over the recent years.

The key signal here is that the new controlling shareholder has basically announced it wants to privatize the company. I think what Hunt sees in Kelly is a longer-term industry recovery and business turnaround story. Kelly’s previous management wasn’t great at operating the business, and the share price chart illustrates that well. If new management can get its act together, fix governance, rein in M&A spending, and ride out the industry’s cycle inflection, shareholders should do quite well from here. KELYA has been trading in the same range for the last fifteen years and currently sits at the bottom of it, so Hunt’s timing looks fairly opportunistic too.

At a high level, it could be argued the stock is inexpensive. KELYA is trading at 6.1x TTM adj. EBITDA and 0.13x sales. That is below even the lower quality blue-collar staffing peers TrueBlue (TBI) and Manpower (MAN), which seems like a punitive valuation given that KELYA is a higher quality business, with more than half of EBITDA coming from specialized, higher margin services that are more comparable to Kforce (KFRC) and Robert Half (RHI).

Note: TBI’s EBITDA multiple is not a relevant comp here, since its earnings were hit harder by the industry downturn, which makes the multiple optically inflated. However, on EV/sales it’s trading above KELYA.

Again, one could say that given the sheer number of adjustments, Kelly’s adj. EBITDA is meaningless. I’d agree, but only to an extent. If you add back most of the adjustments, the multiple would only go up to 8-9x, which is still fairly inexpensive and well below the higher-quality peer valuations.

 

A quick business overview

The company reports through three segments: Enterprise Talent Management (ETM), Science, Engineering & Technology (SET), and Education (EDU).

• ETM is the legacy temporary staffing segment. Kelly places temporary workers across mostly lower-paid blue-collar, admin, and contact-center roles. It also includes broader talent-management services, essentially outsourcing services for managing contingent labor, recruiting permanent staff, and payroll processing.
• SET is the segment Kelly has mostly built through M&A over the last few years, shifting the company more toward specialized workforce hiring. These are still largely temporary placements, but in higher-paid white-collar and technical roles across science, engineering, technology, telecom, and life sciences.
• EDU has been Kelly’s key organic growth contributor over the last five years. The segment is focused on temporary school-district staffing, including substitute teachers, therapy services, special education support, and other school-based workforce gaps.

ETM is the lower-quality piece and has been hit hardest by the broader staffing downturn, making it the closest comp to peers such as Manpower and TrueBlue. However, more than half of Kelly’s EBITDA now comes from SET and Education. In terms of business quality, SET seems to be much closer to professional staffing peers like Kforce and Robert Half, with a similar gross and EBITDA margin profile. The Education business has no perfect public comp, but it is less exposed to corporate hiring budgets and generates EBITDA margins well above ETM and close to SET’s.

Segment financials: