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Terra Firma v Citigroup: Will it go to trial? What does it mean for EMI?

By | Published on Monday 18 October 2010

So, we hear that talks were ongoing as recently as last night in a last-ditch attempt to stop the long awaited (around here) Terra Firma v Citigroup case over EMI from going to court later today.

Even though we know both sides are desperate to not undergo the embarrassment (not to mention the cost) of the trial, every source being quoted by every journalist seems certain an out of court settlement is unlikely. But perhaps that’s just wishful thinking on the part of the journalists, who are looking forward to having the dirty linen of one of the darlings of private equity and one of those big fat bankers aired in public.

As much previously reported, Terra Firma and their chief Gary ‘The Guy’ Hands claim Citigroup and their man David ‘The Worm’ Wormsley provided duff advice ahead of their audacious acquisition of EMI in 2007. Had that advice not been duff, the equity firm argues, it would not have bid as high for the flagging music firm, or might not have bid at all. Terra Firma wants mega-damages from the bank to cover all the money they’ve lost since buying the Electrical & Music Industries. Citigroup denies the bad advice allegations.

Gary decided to fall out with The Worm after he and his banking buddies knocked back the equity man’s proposals for restructuring the multi-billion loan from Citigroup that EMI was saddled with as part of the Terra Firma takeover. The size of that highly public loan has hindered EMI at every move, while agreements linked to it require Terra Firma to keep sinking millions more into the music enterprise to ensure it is operating within agreed parameters.

Although the bank originally knocked back Terra Firma’s debt restructuring plans, it’s known that pre-trial talks have centered on various such proposals, including Citigroup relaxing loan covenants, it writing off a chunk of the debt and/or it exchanging debt for equity.

Citi is publicly bullish about its chances of winning this battle should it go to court, but experts say the bank is taking the bigger risk by allowing it to go to trial. While both sides’ reputations could be tarnished by what is revealed in court, if Citi were to lose, a precedent could be set that might lead to all sorts of other equity groups, advised into dud deals ahead of the credit crunch, coming forward. Terra Firma is therefore possibly assuming that if it holds on, even to the very last minute, the bank will ultimately capitulate and agree to a favorable restructuring of EMI’s debts.

And what does this mean for poor old EMI? Well, more insecurity in the short term, even though the music firm is really divorced from the actual Terra Firma v Citigroup court battle. Should Terra Firma win – in the trial or by scoring a favorable debt deal out of court – then perhaps the major will get the three years of financial security it needs to properly turn things round. If Terra Firma loses, surely it would be all but impossible for Gary to persuade his investors to pump even more cash into EMI next summer, as will be required, even if he wanted to. In that scenario, a split up and fire sale might be most likely.

Which isn’t fun. Though, look, here’s some good news. EMI Group has reached an agreement with the trustees of the company’s pension fund. As previously reported, there was quite a hole in that fund and the UK Pensions Regulator had got involved. But a deal, approved by said regulator, has now been reached. The major will provide an additional £197 million to the fund between now and 2016, with an immediate payment of £16 million.

Says EMI boss man Roger Faxon: “I am very pleased that we have been able to work with the Trustee Board to resolve all outstanding matters and reach this amicable agreement, which is aimed at reassuring members of the Fund of the security of their pensions”.