M&A advice: Consultancies are ready for big-ticket deals

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By:
Kathryn Wells
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As KPMG wins a $5.4 billion advisory mandate, are consultants stealing big deals from investment banks?

The sale by UK state-owned British Nuclear Fuels of US power-plant maker Westinghouse to Japan’s Toshiba for $5.4 billion last month was an important deal. And not just because it was by Japanese standards a large acquisition, or because after a competitive auction Westinghouse was sold for nearly five times more than BNF paid for it in 1999. What made it slightly more unusual was the fact that consultancy KPMG was sole adviser to Toshiba.

The size of the average M&A mandate at consultancy firms is growing:

Announced global M&A average deal size by year
KPMG corporate finance
PriceWaterhouseCoopers
Ernst & Young
Source: Dealogic
Traditionally, the corporate finance teams at the biggest accounting and consultancy firms have been associated with smaller and mid-cap mergers and acquisitions. Before now, M&A deals worth more than $5 billion would typically have been the preserve of one, or perhaps two, investment banks advising on each side of the transaction.

Tim Stone, global chairman of infrastructure and project finance at KPMG, who was consultation partner on the Toshiba transaction, says that his firm is no stranger to big-ticket debt financing deals. Indeed, at the moment, it is financial adviser to the state of Texas on the $187 billion Trans-Texas Corridor Project.

Now he says the firm is more than capable of taking on larger advisory mandates as well. “We’re not ducking our middle-market image, nor is it our aspiration to chase the blockbuster, life-threatening deals.” Rather, he sees the $800 million to $1 billion range as a target, pointing out that the firm can provide advice on deal tactics, debt advisory and valuations. KPMG employs more than 200 staff in M&A in the UK alone, many of them former bankers.

Selling point

Stone adds that consultancy firms have a big selling point over their investment banking colleagues in that corporate boards are increasingly asking where they can find pure, independent advice, not driven by the need to cross-sell an array of other financing products.

“We think we represent the old-style merchant banking, before the banks decided trading was a good idea and ramped up their balance sheets,” says Stone, who worked at Chase Manhattan and SG Warburg in New York before joining KPMG in the mid-1990s. “In investment banks now, it’s all about selling ever more sophisticated gizmos to feed that balance sheet as fast as they can. I like to say that our balance sheet can go up and down in the lift at night.”

Free cashflow

In KPMG, Toshiba was looking for independent advice but did not need a large financing commitment to make it work. Toshiba has no plans to refinance the deal at the moment and says the purchase can be covered by three years of free cashflow. Stone says that consultancies have a particularly strong hand in controlling auction processes or providing independent advice to target companies, as he says investment banks are often more interested in pushing buy-side acquisition financing.

The average advisory mandate that consultancy firms win these days is getting bigger. According to Dealogic, PricewaterhouseCoopers has advised on 22 deals of more than $1 billion since 2000, KPMG has done 30 of this size, and Ernst & Young 31.

Dealogic data also indicate that average deal size has been growing over the past five years [see charts]. And advisory mandates of more than $5 billion are not unheard of. Also in the UK, KPMG advised Songbird on its $8.3 billion bid for a majority stake in the Canary Wharf group, alongside Morgan Stanley Rothschild and Goldman Sachs. And last September, Ernst & Young advised the private equity consortium that bought car rental company Hertz for $15 billion, along with Deutsche Bank, Lehman Brothers and Merrill Lynch.

This level of activity is not sufficient to worry the banks, though. “There are so many deals in which there are multiple advisers that we are increasingly seeing these firms working on the same transactions but we don’t feel that they are affecting our businesses at all,” says the head of north American M&A at an investment bank.

KPMG is not going for the same transformational deals that the biggest advisory banks value so much for league table credit, if nothing else. But Stone says that the firm would like to work as serial advisers to the top corporates. If consultancies go for more retained advisory work, that could put a few investment bankers noses seriously out of joint.

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