Baker Tilly has made a move on troubled RSM Tenon Group, one of only two listed accountancy firms in the UK.

In an announcement to London Stock Exchange, RSM Tenon confirmed that they were in discussions with Baker Tilly UK Holdings Limited which may or may not lead to an offer being made for the entire issued share capital of the company. The statement confirmed that RSM Tenon has been providing certain information to Baker Tilly to facilitate their investment evaluation process. Given the level of debt at RSM Tenon, which is ranked seventh in the Accountancy Top 60 of UK accounting firms, with a turnover of £225m in 2012 (down from £279m in 2011), any potential transaction would require the support of its sole lender, Lloyds Banking Group plc.

In its last interim financial statement for the six months to February 2013, the firm had net borrowings of £80.4m compared to total facilities of £93.0m at 31 December 2012 (2011 £76.5m), with an underlying operating loss of £0.6m (compared with £10.9m in 2011). The firm's annual results are due out in August, but pre-tax losses were £101.8m for the year to July 2012, down from £83m to £7.4m in the six months to 31 December 2012.

With high levels of debt, the RSM Tenon statement to LSE said: 'As a consequence, the board considers that, if an offer is made, it is likely to be at a level which is significantly below the current market price of the ordinary shares of the company.'

Baker Tilly's takeover of the firm could create an entity with fee income of around £450m, putting it in a strong position to compete with the major mid-tier firms, BDO and Grant Thornton. However, there would need to be a major restructuring of the new entity, particularly as RSM Tenon, under the leadership of Chris Merry, has been slow to turn around the firm following the departure of CEO Andy Raynor in early 2012.

Following the firm's acquisition of Bentley Jennison in 2009, the pace of restructuring of the larger business was slow and led to redundancies and cost cutting over the last four years.

In May, six Midlands-based partners quit RSM Tenon, including the senior managing partner, Alistair Wesson, and moved to Mazars Nottingham.

The possible acquisition follows the merger earlier this year of BDO and PKF which industry commentators intimated would be the first of a number of significant mergers across the profession.

In accordance with Rule 2.5 (c) of the City Code on Takeovers and Mergers, it will be an unwaivable pre-condition of the offer being discussed with Baker Tilly that Lloyds Banking Group plc's support is obtained before an offer can be made.

The deadline for Baker Tilly to finalise a deal or withdraw the offer is 22 August.