Deloitte exploring sale of 350-strong restructuring business

10 September 2020 Consultancy.uk

Reports in the British media have indicated that Big Four firm Deloitte has commenced secret talks mooting the sale of its UK restructuring division, even as the coronavirus pandemic looks set to see its profitability surge. The news comes shortly after Deloitte announced thousands of job cuts across its international organisation, as it looks to cut its spending to compensate for a fall in revenues.

The consulting industry is set to be worth around 18% less at end of 2020 than the start, thanks to a collapse in demand from clients looking to tighten their belts in response to the global recession brought on by Covid-19. While the generalist portfolios of the world’s four largest professional services firms – Deloitte, PwCEY and KPMG – are more robust than most amid such a crisis, they are far from immune. As a result, recent reports suggested that the largest of the quartet, Deloitte, could be set to offload more than 10,000 of its global staff in the wake of the coronavirus crisis.

Thus far, Deloitte has not downsized its headcount in the UK. However, it increasingly seems that major change may be on the cards at the firm, as it looks to offset the impact of the downturn on its British wing. This has latterly seen Sky News report that Deloitte has been in talks with the executives running its restructuring unit about allowing them to approach prospective backers of a management buyout. A sale process, would provide the starkest evidence to date of the impact that impending reforms of the big four auditors are already having on their business models.

Deloitte exploring sale of 350-strong restructuring business

Headed up by Daniel Butters, Deloitte’s restructuring business handles insolvencies, which can generate fees for individual mandates running into millions of pounds, along with other forms of corporate restructuring and accelerated sale processes. The unit employs a total of 350 people, including 30 partners. Recently the wing has been engaged to oversee company voluntary arrangements for high street chains including New Look, and has won roles as administrator to fashion brand Victoria's Secret UK and sportswear retailer Go Outdoors, among others.

Deloitte’s decision to float its restructuring business at this particular juncture seems unusual at first. However, with the Covid-19 outbreak having shunted the global economy into a recession, there are few safe bets left for investors to make. With corporate recovery specialists in such keen demand – and business almost certain to boom in the coming months, as the UK bucks a European trend by ending its job preservation scheme – a deal for Deloitte’s restructuring wing could command a hefty sum, which the firm could use to shore up other parts of its business which have been negatively impacted by the coronavirus.

Indeed, there have already been a number of deals for firms specialising in insolvency work in the UK. In August, as the Covid-19 pandemic pushed more companies to liquidation, Quantuma agreed to a £27 million merger with K3 Capital Group. Earlier in 2020, meanwhile, a consortium of investors led by Stone Point Capital and Further Global, who were willing to sink an estimated $4.2 billion into the purchase of Duff & Phelps. Similarly, Moore Fleming was purchased by NMS Consulting, as the US firm prepared to ramp up its offering across Europe.

According to City sources speaking to Sky News, any such deal for Deloitte’s restructuring practice could come with a price tag of several hundred million pounds. Sources also added that Deloitte's UK management, led by CEO Richard Houston, had concluded that offloading the restructuring arm now would allow the firm to optimise its value. This is partially because the workload of the property is about to explode, but also because coming regulatory changes could prevent it from taking on a large amount of work due to Deloitte’s audit market dominance.

Following a number of accounting scandals involving the Big Four, the UK’s audit watchdog of the Financial Reporting Council has effectively banned the foursome from conducting advisory work for audit clients, and is implementing a new model known as operational separation to segregate the two aspects of the businesses. This has fostered a belief among the Big Four that the conflicts issue will inhibit the growth of restructuring operations for as long as they are owned by them. As a result, while Deloitte would be the first member of the group to sell its restructuring business if a deal is brokered, others have explored the option.

Most notably, rumours circulated in 2018 that KPMG was set to offload its corporate turnaround wing. However, the firm’s British leadership eventually announced it was keen to hang on to the major fee-earning operation, amid already booming demand in the UK – particularly thanks to the continued floundering of the country’s retail scene. One insider remarked at the time 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 in any case.


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