Deloitte kicks off talks with bidders for UK restructuring unit

4 weeks ago
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Deloitte is kicking off talks with potential buyers of its British restructuring business amid expectations of a surge in activity triggered by swathes of coronavirus-inspired insolvencies.

Sky News has learnt that Daniel Butters, who heads the big four audit firm’s UK restructuring operations, briefed hundreds of staff this week that he had been given a green light to begin discussions with private equity bidders.

The news effectively scotches speculation in the Financial Times in September that Deloitte’s global executive team had vetoed the plan – which had been revealed by Sky News earlier that month.

One insider said the global firm had ordered a strategic review of the UK restructuring arm, which culminated in the decision this week to allow talks about a sale to get underway.

Deloitte is said to have been persuaded to optimise the proceeds of such a deal, rather than risk seeing an exodus of partners frustrated by growing restrictions on restructuring opportunities within audit firms.

In recent months, a number of senior professionals – including Michael Magnay of Deloitte – have decided to leave big four firms for independent rivals, as impending regulatory reform of the audit sector further inhibits their non-audit activities.

Private equity executives believe the financial profile of businesses providing restructuring services will be especially attractive in the coming years as the UK economy grapples with the fallout from the COVID-19 crisis.

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It emerged last month that KPMG, one of Deloitte’s major rivals, is also exploring a sale of its restructuring arm.

Since the start of the pandemic, Deloitte has been appointed to oversee company voluntary arrangements for high street chains including New Look and Pizza Express, and has won roles as administrator to Victoria’s Secret UK and the Oasis and Warehouse fashion retailers.

Like other big accountancy and law firms, Deloitte has taken significant steps to manage its cost base since the onset of the COVID-19 crisis.

The big four firms – which also include EY and PricewaterhouseCoopers – have seen a marked slowdown in consulting revenues as corporate clients have pared back on discretionary spending.

The decision to explore a disposal of its restructuring business reflects the intense pressure on the largest auditors to eliminate the scope for conflicts of interest after a slew of accounting scandals involving corporate names such as BHS and Carillion.

There is a belief among the big four that the issue of conflicts will inhibit the growth of restructuring operations for as long as they are owned by one of the major audit firms.

The Financial Reporting Council (FRC), the audit watchdog, has effectively banned the big four from conducting consulting work for audit clients, and is implementing a new model known as operational separation to segregate the two sides of their business.

Other units of big four firms have changed hands more recently, with KPMG selling its pensions advisory arm – now called Isio – to management and Exponent Private Equity for more than £200m.

While the big four remain the most powerful players in the UK restructuring market, independent players have made substantial in-roads as they have capitalised on the challenge of managing audit conflicts.

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