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Could an equity deal halt Terra Firma v Citigroup court clash? Probably not

By | Published on Wednesday 13 October 2010

According to Mark Kleinman at Sky News, EMI owner Terra Firma’s last-ditch attempt to avoid a courtroom showdown with bankers Citigroup is a proposal that would see the US bank write off up to £2 billion of the music major’s debts in return for a stake in the company.

As much previously reported, the London-based equity group and its top man Gary ‘The Guy’ Hands are due to face the American bank and Terra Firma’s main advisor there, David ‘The Worm’ Wormsley, in a New York court from Monday. Gary claims The Worm gave him bad advice ahead of Terra Firma’s audacious takeover of EMI in 2007, partly because Citigroup was representing both the equity group and the music company at the same time. 

That said, the legal fight only began last year after The Worm reportedly failed to agree to Gary’s plans to restructure EMI’s multi-billion dollar debts to Citigroup, debts caused by the 2007 takeover. Those plans seemingly involved Citi writing off a billion or so of the debt in return for a commitment by Terra Firma to inject new cash into the flagging music giant. 

As also previously reported, while both sides prepare for battle, ad hoc talks have been ongoing to try to settle out of court, mainly because it’s likely neither side will come out of this legal squabble well in PR terms. The Mail reported on Sunday that such talks occurred as recently as last weekend. 

According to Kleinman, Terra Firma still insists that it’ll only drop its lawsuit against Citigroup if the bankers agree to restructure EMI’s crippling debts. He reckons the latest proposal is that the bank writes off between one and two billion of its loan to EMI and, in return, takes a stake in the music firm. 

Presumably the equity men are arguing that, while EMI is in a mess, most of that mess is directly linked to the stresses caused by the very public Citigroup loan, and day to day operations at the music firm are actually going quite well. Therefore an EMI with much smaller debt commitments would be worth having a stake in. And think of all the free Katy Perry stuff you could take home to your kids. 

Makes sense. Though Sky, like the Mail, like CMU, reckon that while both sides in this dispute recognise an out of court settlement is desirable, neither side is likely to compromise enough to make it happen. Writes Kleinman on his blog: “A successful conclusion to these last-ditch negotiations still seems unlikely given the distance between the two sides during previous talks. So the smart money (not much of which seems to have been on evidence in this takeover) would probably remain on Citigroup and Terra Firma turning up in court next Monday to face the music”.



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