No Shortage Of Advice For EMI

While Guy Hands figures out what to do now that Citigroup has turned down his offer to inject £1 billion ($1.6 billion) into EMI in return for a restructuring of its debt, there’s no shortage of advice coming from the UK’s business writers.

Although the chief of Terra Firma, which borrowed £2.6 billion to buy EMI in 2007, has said he’s still in “constructive discussions” with Citigroup, some are suggesting the bank should just liquidate the business.

Pali Research analyst Richard Greenfield believes the best way for Citigroup to maximize the value of the debt it holds in EMI is to break up the company. He may be going over very old ground but suggests the recorded music division could be hived off to Warner Music, either leaving the publishing business with Terra Firma or auctioning it to the highest bidder.

Warner and EMI have reportedly circled each other at various times in the last 10 years. One potential deal was sunk over anti-trust issues, but Greenfield argues that the music industry is a different place right now and regulators may be more sympathetic next time around.

If it can sell a couple of warehouses full of Beatles albums then the beleaguered UK major may be able to meet its banking covenants in the short time. But the danger is that – the next time it comes up short – the bank pushes it into hiving off the valuable and money-making publishing business.

The Daily Telegraph has already warned that Citigroup may be forced to take control of EMI if it can’t reach a financial restructuring agreement on its debt.

Terra Firma and Citigroup have both written down most of their investments in EMI. Hands has always given the impression that he intends to turn the UK major around and he’s in for the longer haul, but he’s recently said the intransigence of the corporate banks is killing private equity investment.

Hands is clearly making some progress, as EMI recently announced earnings before interest, taxes, depreciation and amortization (EBITDA) for the year ending March 31 were up 81.3 percent to £298 million.

However, beyond the trading figures, the interest on the Citigroup debt is £196 million per year – two-thirds of what the company’s making. There are also restructuring costs of about £110 million and probably a further £110 million on amortization and depreciation.