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Terra Firma v Citigroup: Victory for the bankers, is this the end of EMI?

By | Published on Friday 5 November 2010

So, as expected really, Terra Firma yesterday lost its lawsuit against Citigroup, having failed to convince a New York jury that the only reason it bought faltering music company EMI for four billion pounds in 2007 was because one of the US bank’s top advisors gave the equity firm false information about the intentions of another bidder.

That false information, Terra Firma claimed, came in undocumented phone calls in the 48 hours before its audacious bid to buy the music firm, phone calls that the equity group’s chief Guy Hands had a strangely clear recollection of, despite him remembering very little else about those two days, other than that chocolate biscuits were on the menu.

Citigroup didn’t come out of the trial especially well either. The bank’s man David Wormsley was shown to be rather two-faced, while some may question why the banker chose not to share concerns being raised in various quarters of his organisation about the nature of Terra Firma’s acquisition of EMI with his then good friend Hands.

But Terra Firma’s case was never very strong, the killer witness never materialised, and Citigroup’s argument – that Hands’ lawsuit was just a case of sour grapes over a deal he orchestrated that went bad – always seemed stronger. The jury took just four and half hours to rule in Citigroup’s favour.

After the jury had revealed its conclusion, Citi’s legal man Ted Wells criticised Terra Firma for pursuing the litigation. He told reporters: “I think Mr Wormsley was put through a terrible ordeal. He was totally innocent, he did nothing wrong. He is a man of honesty and integrity”.

Hands left the New York court rather quickly and without comment, though Terra Firma later told reporters in a statement that it still felt the lawsuit had been “an important action to bring and that we had a responsibility to our investors to bring it”.

Had Terra Firma won the case it would have sent repercussions around the investment community, posing big questions about the way big banks work in deals where they are offering advice to all parties, and are set to personally gain by providing a chunk of the finance. But Terra Firma losing poses more questions for the music business. In particular, what now for EMI?

Terra Firma insisted yesterday that nothing has changed. The company said in a statement: “EMI 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”.

Meanwhile, EMI chief Roger Faxon insisted that the major was unaffected by the ruling, telling reporters: “EMI has had a solid operational performance over the last six months, driven by considerable success in both recorded music and music publishing. We are wholly focused on further developing our business, and on delivering positive outcomes for the talented artist and songwriter communities we are privileged to represent”.

On many levels Faxon is right. EMI is doing quite well day-to-day, and, as we’ve said before, the post-Terra Firma revamp of the EMI record labels – while very traumatic at the time – has actually resulted, probably more by accident than design, in a pretty well structured record company, even if it does still struggle to keep senior execs in place for more than a year. And artists-wise, despite the horrible cloud of a three billion pound debt with a bank your owner’s are suing putting a lot of managers off doing a deal with the major, EMI is still behind some of this year’s mainstream success stories, most notably Tinie Tempah.

But Faxon isn’t stupid, and he must know that his moderately successful music business is balancing on a very narrow wedge. Terra Firma will almost certainly have to pump another 100 million into EMI next June so that it can meet its loan covenants with Citigroup, covenants the bank is very unlikely to relax. We know there are a number of Terra Firma investors who didn’t want that cash injection to happen last June, preferring to wash their hands of EMI, and it was a testament to Guy Hands’ skills as wheeling, dealing, investor pleaser that he managed to raise the money and get approval from enough of his backers to let him hand it over to the music firm.

While Hands’ very public bruising in the New York court probably won’t hugely damage his ability to continue to mastermind ambitious takeovers, backed by his party of rich dudes and financial institutions, and aided by Citigroup’s rivals – certainly Terra Firma has continued to do some pretty impressive deals in 2010 – many reckon it will have affected his ability to keep enough of his investors on side to continue to support EMI when it needs an extra 100 million next summer.

Which leads the pessimists to assume that by the time 2011 is out, Citigroup will have repossessed EMI and – with no one likely to want to buy it as a going concern – will have split it up, selling recordings to Warner Music while trying to instigate a bidding war for EMI Publishing in a bid to get as much of its three billion back as possible. And if that happens, it doesn’t matter how well Faxon’s business plan is working out, EMI will be no more.