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EY: rejected TPG offer revives interest in break up

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EY partners let the genie out of the bottle last year. Those keen on splitting the firm’s consultancy away from its audit business did not have their wish granted. But forces were put in motion. Private equity group TPG has approached EY about buying a stake in its consultancy arm, according to a Financial Times report. EY rejected the proposal.

There was some sense to this deal. For one, private equity funds have a fair bit of dry powder at their disposal. Globally this figure stands at $2.1tn, according to Preqin. Even so, TPG’s interest was ambitious. EY’s consultancy arm is estimated to be worth some $100bn, 23 times last year’s ebitda. TPG manages not much more than that at $137bn.

This is a difficult time for EY. In April, the partnership gave up on its plan to break apart, dubbed Project Everest. Global chief executive Carmine Di Sibio, a proponent of Everest, has decided to retire. No replacement has yet been found.

Still, interest in a split will not go away. EY sought to separate its consultancy from its audit practice to avoid conflicts of interest with clients. Partners also hoped to generate some needed capital to fill a deficit in the US business pension fund.

The pitch from TPG should come as no surprise. Private financiers like the asset light, cash flow generative aspect of professional services groups. This interest can come in the form of equity or debt. It also makes sense that some partners at global audit/consultancies might like to sell up, particularly those closer to retirement age.

Deals have not been very large so far. Apollo’s $1.3bn private debt deal with accountancy BDO USA this month is the biggest. There have been equity purchases too. CVC acquired public relations and advisory consultancy Teneo in 2019, which itself bought PR group Tulchan early this year.

But investments are mounting up. Initially, CVC bought out BC Partners’ roughly 50 per cent stake in Teneo. It had already reportedly banked a four-times return on its investment in management consultancy AlixPartners between 2012 and 2016.

EY needs to find a new leader before it can countenance external approaches. But private equity firms will keep circling. The forces propelling a break-up will not disappear anytime soon.

Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore

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