Private equity group TPG Capital has approached EY about buying a stake in its consulting arm in a deal that would herald a second attempt at breaking up the Big Four firm.
TPG outlined its plan for a debt-and-equity deal to separate the consulting arm from EY’s audit business in a letter sent to the firm’s global and US bosses. The consulting business could then be floated on the stock market at a later date, according to the letter, which was seen by the Financial Times.
The approach comes after the firm in April called off a plan, codenamed Everest, to spin off its consulting business via an immediate initial public offering that it hoped would bestow the new company with an enterprise value of about $100 billion (€92 billion).
US-listed TPG, which manages about $137 billion of assets, did not put a value on the consulting business in its letter.
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A separation of EY’s consulting arm would mark the biggest overhaul in the accounting profession since the collapse of Enron auditor Arthur Andersen more than two decades ago, which reduced the Big Five to the Big Four.
Global bosses have argued a separation would free EY from conflict of interest rules that prevent consultants working for audit clients. TPG echoed that argument, suggesting a deal could unlock tens of billions of dollars of value.
The previous transaction, known as Project Everest, was abandoned after months of infighting and dissent from some US executives.
TPG’s approach raises the prospect of a revival of the plan and comes at a delicate time for EY, which has not yet chosen a replacement for global chief executive Carmine Di Sibio. He championed Everest and is stepping down next year after its failure.
It also threatens to reopen internal divisions that surfaced during talks over Everest, which leaders are now trying to heal. Any deal would need the backing of EY’s biggest national firms, which are separately owned by the partners in each country.
It is unclear whether EY has responded to TPG. But one person familiar with EY’s internal discussions said: “The expectation is that the organisation will not pursue this expression of interest.” EY and TPG declined to comment.
Under the plan, EY’s audit operations would continue to be owned entirely by the partners who run it, and TPG would make an equity investment into the standalone consulting arm. It said it was “highly confident” that it would be able to commit the sums required “from both TPG funds and our limited partners, without the participation of other financial sponsors”.
The consulting arm would also raise debt and the transaction proceeds would be used for cash payouts to audit partners and to settle other liabilities, TPG said.
The structure mirrors Everest, which would have handed the average US audit partner a multimillion-dollar windfall for parting with their stake in the consulting arm. Consulting partners would have taken a cut in their cash compensation in return for shares in the standalone arm.
The private equity group said its proposal would offer “transaction certainty” and came with “lower capital markets execution risk” than Everest. That plan was thwarted partly by falling equity market valuations that would have made it more difficult to raise funds to pay audit partners.
“The private nature of the transaction we are proposing affords us the ability to effect the separation with more leverage than would be available in a public setting,” TPG said. This would reduce the dilution of EY’s partners’ stakes in the business and create a “superior equity value opportunity for all parties”, it added.
Everest envisaged loading about $19 billion of debt on to the consulting company, which would have had annual revenues of about $25 billion. EY had total revenues of $45.4 billion in the year to June 2022.
A private transaction would be “a first step” to taking the consulting business public “on a de-risked timeline”, TPG said.
Project Everest would have moved most of EY’s tax practice to the standalone consulting business but some of EY’s US executives objected because they wanted the audit firm to retain a larger part of the tax division. TPG indicated it was open to redrawing the planned split of the tax business.
“We remain highly flexible with respect to the division of the tax business...and would be comfortable with [the audit firm] retaining a majority portion,” it said.
The proposed deal had been reviewed by TPG’s investment committee, including the group’s chief executive Jon Winkelried and president Todd Sisitsky, it added. TPG has asked EY for a 90-day exclusivity period to negotiate a deal. - Copyright The Financial Times Limited 2023
