EY break-up: valuation suffers without its China advisory

As global markets have fractured, so too have EY’s plans to create a worldwide consulting and advisory specialist. This week, bosses at the Big Four accountancy partnership approved plans to create a separate advisory unit. Yet EY’s Greater China consultants will stay put with auditors.

Beijing watchdogs have not approved the restructuring. EY’s 13,000 partners will decide later this year how much this added wrinkle matters when they vote on an already complicated restructuring.

The importance of this loss is moot, partly due to a lack of publicly available data. EY has said that its 29 offices in mainland China, Hong Kong, Macau and Taiwan employed 22,000 last year. That makes up 37 per cent of EY’s Asia-Pacific workforce, including the audit side. Though public figures for its China business are not available, Asia-Pacific produced $6.6bn of revenues last year, hinting at a $2bn plus business.

The question is how much China’s exclusion matters to EY’s other partners. Carmine Di Sibio, EY’s global chair and chief executive, has ranked it among the partnership’s top 15 markets. Its advisory teams will have been busy in recent years. Though Hong Kong’s hot IPO market has slowed in 2022, the mainland markets have shown resilience. Indeed, in the first half, mainland IPOs were up 7 per cent year on year to $35bn, more than double the value in the US.

Lex has estimated an enterprise value for the global advisory unit at $80bn. That is based on an assumed $26bn of revenues for its consulting and advisory unit and similar operating margins and multiples to peers such as Accenture and Capgemini. Assume half of EY’s China revenues sit outside audit. Removing its greater China business shrinks the valuation by perhaps $2bn. Not so much, but EY wants to list the global consultancy late next year.

EY touts its global expertise with clients. Maintaining that image would be harder without offering the insights from its China consulting teams.