KPMG waves away buyout interest in UK restructuring unit

08 October 2018 Consultancy.uk

International auditing and advisory firm KPMG is understood to have rejected informal bids to purchase its UK restructuring business. Rumours had circulated that the professional services giant was set to offload its corporate turnaround wing; however, the firm’s British leadership is keen to hang on to a major fee-earning operation amid booming demand in the UK.

A turbulent period in the UK has seen a growing number of companies across multiple industries either forced to restructure, or file for administration. Anxieties surrounding an uncertain outcome of Brexit negotiations, stagnant wages hampering consumer demand, and sluggish productivity growth have all taken a toll on customer-facing businesses in the last 12 months. While this has been most prominent in the retail segment, it has also impacted on the casual dining sector, the travel industry, and the construction and manufacturing arenas, among other areas.

In this troubled economic environment, the demand for the restructuring services of consulting firms has spiked dramatically. To that end, Big Four professional services firm KPMG has been often sought after for its offering in this segment of the consulting industry by a diverse range of clients. Over the past 12 months, the firm has been engaged in the administrations of collapsed airline Monarch and the historic Towcester Racecourse, among other entities, while having also been recently drafted in by ailing retailer Debenhams to help draw up restructuring plans, as the store looks to avoid the same fate as House of Fraser.

KPMG waves away buyout interest in UK restructuring unit

Perhaps understandably, the demand for these services has led to KPMG’s restructuring unit being viewed by a number of would-be suitors as an item for their wish-lists. According to reports in the British press, this has seen KPMG's UK leadership sounded out by buyout firms over the course of recent months about a potential takeover of the unit, which advises clients on debt and equity-raising activity during periods of financial distress, as well as supervising insolvency processes such as Company Voluntary Arrangements.

The audit market of London had been rife with speculation since the summer that KPMG was considering the sale of its UK restructuring business or even its wider deals advisory division, which is said to have attracted the interest of Hellman & Friedman, a former owner of AlixPartners. Informal approaches are meanwhile  thought to have come from private equity investors, including Permira, which paid $1.7 billion in 2017 to similarly take control of Duff & Phelps. The consultancy was likewise heavily involved in the restructuring scene, and notably acted as the administrator to high-street retailer BHS.

In the case of KPMG, however, the overtures are understood to have been rebuffed, with KPMG’s UK Chair Bill Michael keen to maintain control of a significant fee-earning operation, as business booms. Sources told the media that KPMG had conducted a review of the restructuring operation, which included examining the impact of a sale on the firm's remaining transaction-related business, and had decided not to pursue an auction, with one insider remarking that a bid for KPMG's deal advisory arm would in any event need to value it at "many hundreds of millions of pounds" to be successful.

The alleged considerations of cashing in on KPMG’s restructuring wing come as the Big Four in general are facing increasing pressure to divest from their non-accounting activities in the UK. This comes after the quartet have been stung by a succession of investigations, fines, and accusations of conflicting interests, as they hold both consulting and accounting capacities, which could cross over when relating to large clients. KPMG was hit with multi-million fines from the audit regulator in relation to work carried out on companies such as Ted Baker and Quindell, while a record penalty was imposed this year on PwC for its auditing of BHS.

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Debenhams administrator handed legal threat from Sports Direct

24 April 2019 Consultancy.uk

Earlier in April 2019, the long-suffering high street entity of Debenhams finally collapsed into a pre-pack administration, wiping out equity for shareholders including Sports Direct. Now, Mike Ashley, the controversial owner of Sports Direct, has threatened legal action to remove FTI Consulting from its role as Debenhams’ administrators, following the obliteration of his stock in the company.

As the retail sector in the UK continues to endure a torrid period, British retail stalwart Debenhams endured a spectacular fall from grace. The high street ever-present was founded in the early 19th century, with a single store in London, before expanding to 178 locations across the UK, Ireland and Denmark. However, following a string of profit warnings and several rounds of lay-offs, the company engaged advisors from Big Four firm KPMG to consider its options in the Autumn of 2018.

At the time, Debenhams Chairman Sir Ian Cheshire insisted that the chain was not heading for insolvency, or that it was actively embarking on a company voluntary agreement (CVA). Nevertheless, Debenhams fell into administration in Spring 2019. The news saw Chad Griffin, Simon Kirkhope and Andrew Johnson of FTI Consulting appointed as joint administrators, immediately selling the retailer to a newly incorporated company controlled by secured lenders.

Debenhams administrator handed legal threat from Sports Direct

The pre-pack administration deal meant Debenhams was able to access significant additional funding, preserving 165 of its stores, though plans to close around 50 under-performing stores in the next three to five years remain in place. At the same time, the deal maintained its commercial relationships with suppliers, employees and pension holders. However, it also effectively led all of Debenhams’ previous shareholders – including the retail magnate Mike Ashley – to lose their equity.

Ashley’s Sports Direct firm had increased its stake in the department store chain in 2018, but stopped just short of the 30% stake which would require it to put in a formal offer to fully acquire the business. The transaction fuelled speculation that Ashley was waiting for the opportune time to acquire Debenhams, particularly in the wake of his swoop for House of Fraser. Ashley’s deal there enabled Sports Direct to buy the firm out of administration in a pre-pack deal, allowing the new ownership to controversially wash its hands of the company’s pension scheme in the process.

While some believed this was Ashley’s intent for Debenhams, FTI’s decision to sell the store to its creditors has instead resulted in a sizeable loss for Ashley. The hit of around £150 million from his loss in Debenhams comes after an analysis by The Sunday Telegraph suggested the tycoon had accrued “a sprawling web of stakes” in rival companies, and that he may be nursing losses of more than £500 million.

Bad press

Ashley – who recently lost a complaint ruling by British press regulator Ipso allowing the Times to note that he shared many characteristics with North Korean dictator Kim Jong-un – has been outspoken in his contempt for FTI since the news broke of Debenhams’ sale. The Sports Direct CEO has called for the resignation of FTI from its role as administrator, after his stake in the department store chain was wiped out. The Guardian stated that a letter to FTI saw Sports Direct’s lawyers even threaten legal action to remove the advisory firm as administrators because of a conflict of interests.

According to the reports, the document claimed, “[Sports Direct] will do everything available to it to unwind the damage caused to the company and other stakeholders (including large and small shareholders) by the events of today including but not limited to challenging the appointment [of FTI as administrators] and all consequences of it.”

The letter allegedly claims that FTI had been involved with Debenhams since the second week of February, and had engaged with the group’s lenders. The legal team reportedly suggested that this would consistute a conflict of interest, because FTI sold the retailer’s operating companies to the same lenders via a pre-pack administration.

This comes weeks after Sports Direct was itself accused of becoming overly cosy with a professional services firm, which has seen its auditor Grant Thornton placed under scrutiny for its continued role with the firm. In 2018, it was reported that Grant Thornton was set to stand aside from the role due to competition rules. It had held the role since before Sports Direct floated on the London Stock Exchange in 2007, while Phil Westerman, the Partner at Grant Thornton responsible for signing off Sports Direct's accounts, had himself undertaken the work for five years. 

Neither situation is understood to have changed, leading to the questioning of the independence of Grant Thornton’s auditing work with Sports Direct. Such is the level of bad press surrounding the retailer, that the Big Four of the accounting and advisory world – wary of incurring a new scandal of their own – are said to have ruled out taking the contract over.