RSM Tenon & Baker Tilly: In this together...

ALTHOUGH MANY POINT OUT that RSM Tenon’s takeover by Baker Tilly was to save it from a potential all-out collapse, what is its signficance for Baker Tilly? Is the deal vital to keep Baker Tilly competitive, following recent changes in the market, meaning that they need each other as much as the other?

The writing was on the wall for listed firm RSM Tenon when it restated accounts in 2011 following the discovery of accounting discrepancies. The firm then had to post a £71m loss restating accounts that reduced the prior year’s pre-tax profit by £12.1m.

Overall, profit fell to £683,000 from £7.5m.

Chief executive Andy Raynor and chairman Bob Morton stepped down, with ex-BDO international CEO Jeremy Newman taking an interim role in the management team while Chris Merry, something of a turnaround expert, was recruited as CEO.

Shortly after it was announced that the Financial Reporting Council would investigate RSM Tenon’s auditor’s PwC for their role in the uncovered accounting discrepancies, which is still ongoing.

Merry and Co busied themselves by restructuring the business, offloading various elements, making redundancies and changing the business into a more streamlined, profitable entity.

However in February 2013, despite posting a profit in its interims, RSM Tenon announced it was unable to reach a new agreement with its sole lender Lloyds Bank to “reset” its lending facility.

The banking covenants with Lloyds were based on a larger firm than the heavily restructured practice. The firm was in dire straits and in need of rescuing, with many speculating that the bank was key to instigating discussions between RSM Tenon and Baker Tilly.

The listed firm made a loss of £10m for the six months ended 31 December 2012 compared to the £70.6m it posted for the same period a year earlier.

The grass isn’t always greener

But for Baker Tilly, the market conditions, along with its own financial indicators, suggest the deal is more than a mere folly.

Baker Tilly’s group figures for the year ended 31 March 2012 show bank loans totalling £7m, repayable in a mixture of quarterly and annual instalments between April 2012 and February 2017.

According to Baker Tilly UK Holdings Limited, the operating profit before tax was £15.1m. In the same report it shows that net current assets were £21.2m, coupled with further facilities and overdrafts of £19m, that “have resulted in the group being ideally placed to capitalise quickly on opportunities as they arise”.

As the ninth largest firm, according to Accountancy Age’s Top 50 survey, Baker Tilly had revenues of £171.1m and a gross profit of £112.7m. This compares to RSM Tenon’s sixth spot on the table with a fee income of £207m.

Although this may sound healthy, other mergers, acquisitions and changes to networks and associations have heated up the environment in which Baker tilly operates.

Recently BDO and PKF merged. The international network, left without a firm after PKF’s defection, turned to LittleJohn, adding it to the network. Phil Shohet, a director a practice consultancy Kato, said Baker Tilly probably needed to come up with something following the BDO merger, if they wanted to remain competitive.

“Baker Tilly were being left behind by BDO and Grant Thornton, and you’ve got to think from an international point of view who were they going to attract?”

Lloyds Bank has arranged a deal to offer the credit facility to Baker Tilly in order for them to buy RSM Tenon. However, Lloyds Bank is owed about £88m from the RSM Tenon parent company holding all the debt.

Shohet believes that Baker Tilly are mainly after RSM Tenon’s client base, but there could be changes afoot. He notes that Baker Tilly recently quit financial services, when it sold that division in 2007. However, this is an area in which RSM Tenon has strong expertise. “Why would they want to go back to that again?” says Shohet.

Experts suggest it is typical Baker Tilly strategy to grow by acquisition but, the issue will be in unravelling RSM Tenon to produce a return on investment – particularly with the acquired being larger than the acquisitor.

Baker Tilly will also have to work hard to hold onto the value within the group, where there is always the potential that factions disgruntled by the deal may seek to break away.

According to the Accountancy Age Top 50+50 data, Baker Tilly’s audit income comes in at £80m while RSM Tenon’s is £69m. However, insolvency at RSM Tenon hit £41m while Baker Tilly’s is £29m. Tax services’ fee income is largely similar, with Baker Tilly pulling in £48m and RSM Tenon £42m.

Until the full details regarding the sale – which should be available in a creditor’s report – and information from Baker Tilly starts to materialise, little is known about how this will take shape.

Although the pre-pack sale of RSM Tenon has been arranged, Baker Tilly’s shareholders – its partners – must vote on it before the sale can be confirmed. It is expected that a vote will take place on Friday 6 September with a decision announced on Monday 9 September.