Comment: FCA's safety first stance on Tilney's Smith & Williamson deal is the right one

Smith & Williamson’s takeover by — sorry, “merger with” — Tilney appears to have landed in the rough.

The two wealth managers declared they were tying the knot last year in a deal valuing the combined group at £625 million, but getting it done is proving harder than making the announcement.

There’s been much speculation as to why, including complaints from S&W shareholders that the deal is funded too much in shares and not enough in cash.

But then it emerged in January that the main blockage is actually the FCA .

Details are sketchy, but reports this week suggest a fundamental problem has arisen: the regulator doesn’t think the business would be financially robust enough.

Why? Because it appears Tilney’s private equity backers at Permira were inclined to fund the deal with high levels of debt.

That’s the standard playbook for private equity firms, which get a big tax advantage against funding with traditional equity, but it makes the resulting business more vulnerable to future shocks.

You get a flavour of the Permira model from Tilney’s most recent accounts, showing net debt of £385 million and operating profit of £22.9 million. The company reportedly refinanced since then, but that’s clearly the model.

The regulator, it seems, took fright at such a structure handling some £45 billion of people’s money. As analyst Jeremy Grime of Charlton Illingworth puts it, given what we’ve seen in the markets lately, that’s no bad thing.

Back to the drawing board, chaps.