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Terra Firma's Purchase of Music Giant EMI Hit All the Wrong Notes
By Alain Sherter
Updated on: February 2, 2011 / 1:58 PM EST / MoneyWatch
The takeover is a surprise, and it's unclear if Terra Firm approved the transaction. Reports The Deal 's Richard Morgan (no public link):
First, EMI's previous owner, Terra Firma Capital Partners Ltd., is in the midst of appealing a jury's verdict that Citi did not commit fraud while assisting Terra Firma in its purchase of EMI. Second, Terra Firma's next covenant check on the £2.6 billion of senior financing borrowed from Citi to acquire EMI won't occur until March. And this was to have been followed by a three-month reprieve to allow Terra Firma to raise funds for any equity cure arising from the covenant check.
Big gamble, big crash Second, Hands gambled -- big time. Although large LBOs were common at the time, as PE buyers capped a buying binge that started in 2003, Terra Firma sank nearly a third of a $7.3 billion fund into acquiring EMI. It also overpaid, with the deal valued at a pricey 18 times cash flow. And like a number of other buyout firms during the PE boom, Hands swamped EMI with debt, damaging its balance sheet as the company was trying to regain its footing.
Third, he underestimated the difficulty of reviving a music label during a time of tumultuous industry change. U.S. music sales have been falling fast, while online business has been fairly flat. As a result, EMI sales plunged after the deal. Things got even worse when a number of the company's marquee acts abandoned ship, including Paul McCartney , the Rolling Stones and Radiohead (pictured above), amid concerns that Hands might dial back on lucrative contracts. Management turmoil at EMI further complicated getting the company back on track.
It didn't help that Hands and his lender on the deal were at war. Terra Firma sued Citi in 2009 after accusing the bank of giving it bad advice during the original acquisition. (A court recently ruled in Citi's favor, although Terra Firma is appealing .) The firm's relations with Citi, which might've been persuaded to restructure EMI's debt, soured.
Citi is presumably eager to wash its loan portfolio of EMI. In taking over the company, which had sales of £1.6 billion for the year ended March 31, 2010, the bank is slashing its debt load by 65 percent to £1.2 billion. That could make acquiring EMI more palatable, with deal speculation already heating up. EMI's most likely destination? A PE firm:
Kohlberg Kravis Roberts , which already has a music publishing joint venture with Bertelsmann (BTG) called BMG , leads a pack of private equity suitors including Apax , Apollo and Permira . Existing EMI rivals including Vivendi 's (VIV) Universal Music and Sony 's (SNE) separate recorded music and music publishing companies are also looking closely to see whether they can bulk up by buying parts of EMI. Industry executives do not rule out wealthy individuals or funds becoming involved.
Image from Wikimedia Commons, CC2.5 Related:
- Citigroup: Bye-Bye, Ms. American Pie
- Citigroup's Analyst Blackball: How to Make it Look Like You're Hiding Something
- Citigroup's Pandit, Feds Ignore the Elephant in the Room
Alain Sherter covers business and economic affairs for CBSNews.com.
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Terra firma loses emi case.
A jury in New York has ruled that Citi banker David Wormsley did not trick the private equity firm into overpaying for EMI in 2007.
Terra Firma Capital Partners lost its case against Citi Thursday when a jury unanimously decided the firm had not proven its accusation that Citi banker David Wormsley lied to the firm's chief Guy Hands, tricking him into overpaying for struggling music publisher EMI.
The jury deliberated for less than a day on the verdict, which found Citi not liable of a charge of fraudulent misrepresentation. Terra Firma “reserves its right to appeal”, the firm said in a statement.
“We are disappointed that the jury found that we did not prove that we relied on misrepresentations from Citi, which caused a loss to our investors,” the firm said. “We will continue to focus on achieving the right result for them and for EMI whilst continuing to support the successful development of our other nine businesses.
“EMI itself will continue to build on its track record of the last three years, during which time it has improved its market position, achieved tremendous success with its new and existing artists, and produced remarkable growth in cash profits,” the firm said.
Terra Firma's accusation was “irresponsible”, Citi said in a statement.
“We are very pleased that the jury reached a unanimous verdict confirming what we have said from the beginning: That Citi and David Wormsley treated Terra Firma with honesty and integrity in the EMI transaction,” Citi said. “The jury's verdict makes clear that Terra Firma's irresponsible accusations of fraud were nothing more than a misguided attempt to gain leverage in debt restructuring negotiations.”
Had the jury found Citi liable, it would have then had to determine how much in damages the bank owed Terra Firma, up to a maximum of £1.5 billion. With Thursday's decision, that point is now moot.
Terra Firma acquired EMI for £4 billion in 2007.
In delivering its verdict, the jury sided with Citi attorney Theodore Wells, who argued Hands brought the lawsuit against Wormsley as a way to make up for the struggling EMI investment.
“[Hands] has lost hundreds of millions of dollars [on EMI]. He made a mistake. And what he does, he brings this lawsuit,” Wells said during his closing argument Wednesday. “Rather than take responsibility for the fact that he made a mistake, the way all of us have to take responsibility for our acts, he turned around and filed this lawsuit saying to the world, saying to his investors, 'it wasn't my fault. I was tricked. Don't blame me, blame David Wormsley'. That's garbage.”
Wells also argued throughout the almost three-week trial that Terra Firma did not have any kind of documented proof of Wormsley lying – only the word of Hands and a handful of witnesses who testified they heard second-hand about the alleged Wormsley lies.
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Terra Firma set to land EMI this week
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By Elizabeth Rigby in London
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Terra Firma looks set this week finally to buy EMI after the buy-out fund secured a last-minute extension for its £2.4bn ($4.9bn) agreed deal from the UK Takeover Panel.
Guy Hands, founder of Terra Firma, now has until 1pm on Wednesday to secure acceptances from 90 per cent of the shareholders to close the 265p-a-share deal and secure guaranteed funding from Citigroup, the investment bank. The original deadline was 1pm on Sunday. On Friday evening, Terra Firma had the backing of 85 per cent of shareholders.
The extension comes after a tense week, with Terra Firma rushing to secure the acceptances. Shareholders had been sitting on the shares through the offer period because they thought Warner Music might make a counter-bid for the company. It was only ten days ago that the rival business confirmed it did not have such plans.
A person close to the companies said on Sunday Terra Firma was confident it would hit 90 per cent acceptance by Wednesday.
Rather than seeking the extension, Mr Hands could have asked Citigroup – which is advising Terra Firma and EMI on the deal – to waive the 90 per cent acceptance level required to guarantee the funding.
Investment banks typically will waive the 90 per cent formal requirement, but not until the closure of the deal. However, tightening credit markets have put banks under pressure not to take on more debt. A source close to Terra Firma said on Sunday that Mr Hands would not renegotiate the debt arrangements should it not reach the acceptance threshold.
However, abandoning Terra Firma and EMI would be “suicidal” for the bank’s relationship with two of its best UK clients, said another person close to the deal last week.
Even if the deal goes as planned, credit market conditions could force Terra Firma to pay more for the £3.5bn debt package while Citigroup could be left holding a larger chunk of the loan than it counted on.
Investment bankers said any hard line from Citigroup could merely be a tactic to secure better terms on the package it puts together to replace Terra Firma’s temporary financing.
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IMAGES
VIDEO
COMMENTS
Resize. Guy Hands, the founder of private equity group Terra Firma, on Thursday lost his multi-billion dollar lawsuit against US bank Citigroup in New York, which he brought after he alleged one of its senior bankers misled him over his 2007 takeover of the music group, EMI. Here Financial News profiles the history of the troubled deal ...
First, the timing was lousy. His buyout firm, Terra Firma, took out a big loan from Citi in buying the music label for $6.6 billion at the top of bubble in 2007. When things crashed, so did EMI's ...
EMI, the world's third-largest music group by sales, said it had agreed a 265p-a-share cash bid from Terra Firma, run by Guy Hands, hours after the buy-out group made a final, sealed bid ahead ...
The ill-fated investment in EMI ultimately cost investors in Terra Firma's second and third funds around £1.6 billion ($2.3 billion; €2 billion), which the firm is seeking to win back from Citi in the courtroom. The case has clear implications for Citi, Hands and LPs in Terra Firma's funds: in short, reputation and a substantial amount of money.
In Table 5, we have extracted the profit and loss statement from Terra Firma's accounts, which reveal a €1.7 billion write-down "provision for impairment" arising from the revaluation of the investment in EMI.In an earlier year (2007) Terra Firma recorded a capital gain on its investments (assets held) of €1.039 million, which was then ...
Terra Firma's buyout of EMI. EMI was acquired by the private-equity firm Terra Firma (Maltby Capital Ltd. 1), managed by Guy Hands, in August 2007 for £4.2 billion. Terra Firma immediately set about presenting narratives about EMI's problematic past and the promise of a different and better future for EMI.
The deal represents Terra Firma's biggest investment since it lost control of iconic music publisher EMI last year. Despite the fallout from that deal - it was forced to write off its entire £1.6 billion investment in EMI - the firm has chosen to taken on another emotive investment.
The size of the writedown on Terra Firma's £2.3bn investment in EMI illustrates that Mr Hands has already accepted his stake in the heavily indebted music company has little more than option value.
Terra Firma, the UK buy-out firm, looks set this week finally to buy EMI after securing a last-minute extension for its £2.4bn agreed takeover of the music group from the UK Takeover Panel at the ...
Shortly after Terra Firma's agreed bid for EMI was confirmed, press reports claimed Fifield, working with investment group Corvus Capital, was preparing a bid valuing EMI at 278 pence per share.
Terra Firma will return to court this morning as the firm seeks once again to win damages worth £1.6 billion ($2.3 billion; €2 billion) from Citi in connection with its lost investment in music group EMI. The case starting today marks the second round of a battle between Guy Hands' private equity firm and the New York-headquartered bank.
Terra Firma chairperson Guy Hands needed help. In less than four years, EMI Records went from a potentially high ROI asset for Terra Firma's fund portfolio, to a company that was repossessed by ...
LONDON (MarketWatch) -- Terra Firma Capital Partners' GBP2.4 billion recommended bid for music company EMI Group PLC (EMI.LN) looks to have a good chance of success, despite Warner Music Group Co ...
British music company EMI <EMI.L> agreed to a 2.4 billion pounds ($4.73 billion) cash takeover from private equity group Terra Firma on Monday in a surprise move that could finally shut out long ...
Terra Firma, run by Guy Hands, injected £28m into EMI in March, indicating its first-half results to March 31 failed to live up to conditions in the £2.6bn in loans Citigroup extended to finance ...
EMI accounts for about 30 per cent of Terra Firma's last two funds. Terra Firma has carried out a series of equity injections into EMI, including £28m in March. This move signalled that EMI ...
EMI was put into administration in February 2011 and sold to Citigroup in a pre-packaged process without Terra Firma's involvement. Citigroup became the new owners of EMI despite the fact that EMI was up-to-date on all interest payments and had complied with its financial covenants throughout Terra Firma's ownership. 3m.
Terra Firma acquired EMI for £4 billion in 2007. In delivering its verdict, the jury sided with Citi attorney Theodore Wells, who argued Hands brought the lawsuit against Wormsley as a way to make up for the struggling EMI investment. "[Hands] has lost hundreds of millions of dollars [on EMI]. He made a mistake.
Terra Firma looks set this week finally to buy EMI after the buy-out fund secured a last-minute extension for its £2.4bn ($4.9bn) agreed deal from the UK Takeover Panel. Guy Hands, founder of ...
Capital expenditure (£31m) (£43m) attendance 75m 71m. 1 2007 was a 53-week year. On a comparable 52-week basis, revenue was £539 million, eBiTDa was £68 million and attendance was 73 million 2 2008 results are subject to final audit approval. a unique perspective Terra Firma annual review 2008 58.