Inside TPG’s failed pitch to break up EY

In today’s newsletter: 

• TPG’s failed courtship of EY

• Why Apollo sold its $500mn loan to Yellow

• Another legal battle from Greensill’s collapse

Bad timing for TPG’s EY proposal

As EY partners stashed away their hiking boots after an unsuccessful “Project Everest”, private equity group TPG was plotting another jaunt up the mountain.

But the Big Four accounting firm wasn’t ready to gear up for another expedition. 

EY has rejected a proposal from the US buyouts house to split the firm and take a stake in its consulting business, the FT reported on Wednesday, months after its own attempt to spin off the consulting unit and list it on the public market collapsed. 

For EY, as one person familiar with the matter told DD, TPG’s proposal — which the FT revealed the details of earlier this week — came both too late and too early. 

Too late because, having killed the first version of Everest, the US leadership was in no mood to start a new discussion and global executives are keen to cool tempers across the organisation. And too early due to the power vacuum left in its wake as the firm’s global boss and chief spin-off proponent Carmine Di Sibio prepares to retire next year.

Like Everest, TPG’s proposal would’ve granted audit partners a multimillion-dollar windfall for parting ways with their stake in the consulting arm.

Unlike Everest’s plan for a public listing, however — which floundered in part because of falling equity market valuations — TPG contended that a private transaction would allow the kind of leverage to create a “superior equity value opportunity for all parties”.

It also said the auditors could keep most of EY’s tax practice, which served as a deal-breaker the first time around.

Among the most interesting parts of TPG’s argument was that its own IPO and $2.7bn purchase of private credit investor Angelo Gordon made it uniquely qualified to see through a transition to a new profit model at EY.

“Our experiences in these transactions have given us significant pattern recognition with respect to how to make the transition from a partnership that distributes profits annually to an institutional ownership structure,” its proposal stated.

TPG’s IPO helped usher in a new era in private equity in which firms list their shares but sell only a small sliver of their performance fees to the public, as DD readers have seen with European buyout group CVC Capital Partners’ revived listing plans.

But TPG’s ambition to help EY pioneer a new model in the accounting world has been thwarted for now, even if a significant number of EY partners think a break-up is inevitable in the future.

The courtroom drama behind Apollo’s $500mn loan sale

When failed US trucking group Yellow filed for bankruptcy last week, its lawyers at Kirkland & Ellis filed papers in a federal court in Delaware saying that it had struck a deal with Apollo Global Management to pump in $142.5mn as fresh bankruptcy financing.

Despite a potential $32mn closing fee going to the private capital firm run by Marc Rowan, Yellow argued, negotiations for the so-called debtor in possession (DIP) loan had been “hard-fought, arms length and good faith”.

Such loans, once a routine part of corporate restructurings, have in recent years become a lucrative path to payouts for lenders using aggressive financial and legal engineering.

But two other Yellow stakeholders — MFN Partners, the Boston hedge fund spun out of Baupost Group, and freight group Estes Express Shipping — had taken issue with Apollo’s harsh terms, and were suddenly interested in offering better terms.

The subsequent free-for-all is an interesting glimpse into the game theory of Chapter 11. 

Apollo, a longtime lender to Yellow holding $500mn in secured debt, simply wanted to get repaid on its high-ranking loan, extract some fees on the separate DIP financing and wrap up the auction within the next 90 days.

In order to maximise the bankruptcy auction proceeds, MFN and Estes expressed interest in placing a DIP loan at the bottom of the debt stack in exchange for a sale process longer than three months, offering not only lower-cost debt but also a more relaxed timeline to sell assets. 

As DD’s Sujeet Indap scooped on Tuesday, Apollo has now taken its ball and gone home. It sold its $500mn loan to a credit fund associated with Ken Griffin’s hedge fund Citadel. 

Apollo has been a canny DIP loan provider in many bankruptcy cases over the years. It took its shot to extract a sweet deal from Yellow. Other players then sprung into action to protect their own interests. 

The prevailing party in the DIP auction is expected to be revealed at a Thursday hearing in bankruptcy court. But Yellow itself is expected to be the biggest winner from the contest.

When does a financing fee become fraudulent?

At what level does a fee for arranging financing become “unreasonable and excessive”?

When it’s equivalent to 10 per cent of the money raised? 15 per cent? 20 per cent?

To take things a step further, is it possible for a fee to be so high that keeping it quiet represents a “fraudulent non-disclosure”?

That’s exactly the scenario a unit of Japanese insurance firm Tokio Marine is trying to persuade a court in Australia occurred in the case of collapsed finance firm Greensill Capital.

Tokio Marine’s Australian subsidiary Bond & Credit Co arranged $10bn of insurance coverage for Greensill in happier times, back when the then heavily hyped start-up had backing from SoftBank’s Vision Fund and counted former UK prime minister David Cameron as an adviser.

Now, investors in Greensill’s complex investment products are trying to claim billions of dollars against that insurance, while BCC is arguing in court that the finance firm “fraudulently misrepresented” material matters, rendering the policies void.

In its latest legal salvo, BCC has homed in on a fee Greensill charged a company called Catfoss that was engaged in building projects for NHS hospitals in England.

According to BCC, Catfoss paid Greensill a £10.4mn structuring fee out of a lending facility that only amounted to £15.3mn, which was “in excess of any fee that would be negotiated by parties in a bona fide arms’ length relationship”.

We suspect that even DD readers that have closely followed the ins and outs of the long-running Greensill saga may have little familiarity with Catfoss.

The company is part of a wider network of businesses connected to Andrew Foreman, an entrepreneur from the north of England whose personal website describes him as “a market leader in the modular and portable building industry”.

Foreman has now entered a form of personal insolvency, however, claiming he has “lost everything”.

“Since the Greensill collapse it has been the most horrendous 2.5 years of mine and my family’s lives,” the businessman wrote in a letter to a group of his creditors earlier this month.

Job moves

• Shearman & Sterling’s chief commercial officer Robert Brown has joined Sheppard Mullin as chief operating officer ahead of its $3.4bn merger with UK firm Allen & Overy.

• Pinterest directors Leslie Kilgore and Andrea Wishom have resigned from Nextdoor’s board of directors in response to ongoing efforts by the US Department of Justice to stop directors from holding similar board positions at rival companies.

• Goldman Sachs has named John Greenwood co-head of Latin America and head of investment banking for the region, per Reuters.

Smart reads

Choose your fighter As Goldman Sachs’ top ranks grow increasingly frustrated with boss David Solomon’s leadership, the CEO’s most loyal deputy John Waldron is under pressure to pick sides, Bloomberg reports.

Time for a makeover Estée Lauder’s big bet on China has failed to pay off. Now its longtime chief Fabrizio Freda is facing one of the biggest turnaround challenges in his career, The Wall Street Journal reports.

Trans in corporate America Former Goldman Sachs banker Maeve DuVally’s coming out as transgender was a watershed moment for Wall Street. She discusses the need for more companies to step up for trans staff in an interview with the FT.

News round-up

Energy Transfer to buy Crestwood for $7.1bn in latest US pipeline deal (FT)

ArcelorMittal weighs possible bid for US Steel (Reuters)

China thwarts Intel’s $5.4bn Israeli chipmaker purchase (FT)

Vietnamese EV maker worth more than Ford or GM after US listing (FT)

Norway oil fund chief attacks UK backlash against green measures (FT Interview)

GQG Partners buys 8.1% stake in Adani Power for $1.1bn (Reuters)