TPG Capital, a private equity firm, has approached EY to buy a stake in the consulting arm of its company. This would be a second attempt to break up the Big Four.
In a letter to TPG’s US and global bosses, the company outlined its plan to create a debt-and equity deal to separate EY from the audit division. According to the letter, the consulting business would be floated at a future date on the stock exchange.
The move comes after the firm in April cancelled a plan to spin off its consultancy business via an initial public offering (IPO) that was hoped to give the new company an enterprise value of around $100bn.
TPG (US-listed), which manages assets worth $137bn, didn’t put a price on its consulting business.
Separating EY’s consulting division would be the biggest change in the Accounting profession for more than 20 years, since Arthur Andersen, the Enron auditor who collapsed two decades ago and reduced the Big Five down to four.
Global bosses argue that a separation will free EY of conflict-of-interest rules which prevent consultants from working for audit clients. TPG also echoed this argument and suggested that a deal would unlock tens billions of dollars in value.
After months of internal conflict and dissension from US executives, the previous transaction was abandoned.
TPG’s approach could lead to a revival of this plan. It comes at an important time for EY. The firm has yet to choose as a successor for Carmine Di Sibio, its global chief executive. He was a champion of Everest, and will be stepping down after the failure.
This deal also has the potential to reopen divisions within EY that were exposed during discussions over Everest and which leaders are currently trying to mend. Any deal would require the support of EY’s largest national firms which are owned separately by partners in each country.
Uncertain whether EY responded to TPG. One person who is familiar with EY’s internal discussions stated: “The organisation expects to not pursue this expression.” EY declined to comment.
According to the plan, EY audit operations will continue to be owned by its partners, while TPG will make an equity investment in the standalone consulting arm. It stated that it was “highly certain” it could commit the required sums “from TPG funds as well as our limited partners without participation from other financial sponsors”.
TPG stated that the consulting arm will also raise debt, and proceeds from the transaction will be used to pay audit partners in cash and settle other liabilities.
Everest is a structure that would have given the average US audit partner an windfall of millions for selling their stake in the consultancy arm. Consulting partners would receive a smaller cash payout in exchange for their shares in the stand-alone arm.
Private equity group claimed that its proposal offered “transactional certainty” and “lower capital market execution risk” than Everest. This plan was foiled in part by declining equity market valuations, which would have made it harder to raise money to pay audit partners.
TPG stated that “the private nature of the proposed transaction affords us greater leverage to effect separation than we would have in a public setting.” The dilution to EY’s partners would be reduced and the equity value for all parties would increase.
Everest envisioned a debt of approximately $19bn to be owed by the consulting firm, which would have annual revenues of around $25bn. EY’s total revenue in the year up to June 2022 was $45.4bn.
TPG stated that a private transaction is “a first step” in taking the consulting firm public on a “de-risked timetable”.
Project Everest was supposed to move the majority of EY’s tax practice into the separate consulting business, but US-based EY executives were against it because they wanted to keep a greater part of EY’s tax division within the audit firm. TPG said it was willing to change the plan for the split of its tax business.
“We are very flexible in the division of our tax business. . . It said that it would be happy with [the auditing firm] keeping a majority of the portion.
It was revealed that the proposed deal was reviewed by TPG’s investment committee. This included chief executive Jon Winkelried, and president Todd Sisitsky. TPG asked EY to grant it 90 days of exclusivity in order to negotiate the deal.