EY rejects TPG's proposal to buy stake in consulting arm

EY on Wednesday told its partners it had rejected a proposal from US private equity firm TPG Capital to break up the firm and buy a stake in its consulting business.

TPG in July sent a letter to EY proposing a plan for a debt-and-equity deal that would have revived the firm’s failed split plan, codenamed “Everest.” The Financial Times revealed the TPG proposal in a Tuesday report.

EY on Wednesday told partners the “TPG approach was a preliminary expression of interest and there has not been further engagement.” The company added that it was not actively engaging in any transactions.

TPG’s pitch arrived a few months after Everest failed, largely because of objections from US audit partners who desired a larger portion of the tax consulting business as part of the proposed independent audit company.

The Everest split plan would have loaded up debt to pay off audit partners for their stake in the consulting business, and then spun off the consulting arm in an IPO. The move sought to unlock additional value by freeing the consulting arm from conflict-of-interest regulations barring the concurrent provision of advisory and audit services to the same company.

The Everest deal also struggled with falling equity market valuations that made it more difficult to obtain the multimillion-dollar windfalls for audit partners.

In TPG’s proposal to EY – which was viewed by the Financial Times – the private equity firm said it could offer “transaction certainty” and “lower capital markets execution risk” than Everest.

The private nature of the deal also would allow it to “effect the separation with more leverage than would be available in a public setting,” TPG wrote.

The private equity firm was also open to granting audit partners a majority of the tax consulting business to get the deal through.

A person familiar with the matter told the Financial Times the proposal was rejected because it arrived at the wrong time. Firstly, US leadership is in no mood to start a new discussion so soon after killing the Everest deal. Secondly, any movement on a new avenue isn’t likely to arrive until EY finds a successor to global chief Carmine Di Sibio – the mastermind of Everest – who is set to retire in June 2024.

Private capital is generally keen on professional services firms due to their asset-light and cash-flow generative nature.

Apollo earlier this month announced a $1.3-billion private debt deal with accountancy BDO USA.