Hands Sues Citi Over EMI Deal

Terra Firma chief Guy Hands has filed a $1 billion lawsuit against Citigroup, claiming the company talked him into buying EMI under false pretenses.

Hands’ fraud claim was lodged in New York Dec. 11 and says the American financial services company lied to him in 2007, during the bidding for the UK’s only major music company.

He accuses Citigroup of misrepresenting “fundamental facts” about the £4 billion auction.

Although investment bank Greenhouse was running the sale of EMI, the Sunday Times says the suit focuses on the behind-the-scenes role by played by David Wormsley, Citigroup’s top London-based investment banker.

The paper reported that Wormsley hurried Terra Firma into a bid against a rival, believed to be Cerberus Capital Management, although he knew the rival had already pulled out.

Terra Firma says Wormlsey called Hands in the early hours of May 27 and warned him another bidder would win the battle for EMI unless he tabled a bid of 265 pence per share in a matter of hours.

Hands and Wormsley have worked together on a string of private equity deals, buying and selling everything from pubs to military housing.

The suit, which was filed by David Boies, the attorney who led the US antitrust case against Microsoft, claims Wormsley’s “misrepresentations” prompted Terra Firma to make a binding bid it would not otherwise have made.

Terra Firma lawyer Jonathan Sherman told Reuters his client wouldn’t have made the offer if it had known it was the only remaining bidder.

“The damages are some amount of equity, which we think reaches into the billions of dollars, reflecting equity that we wouldn’t have parted with but for the fraud that Citigroup committed,” he said.

The suit also reportedly claims Citigroup is trying to bankrupt EMI to get control of it and sell it off to Warner Music.

A Citigroup spokesman said the suit was without merit and the bank would defend itself vigorously.

With or without merit, taking legal action looks to have torpedoed any chances of Terra Firma and Citigroup thrashing out an agreement to restructure EMI’s debt.

Hands failed a month ago to persuade the investment bank to scrub £1 billion of the loans in exchange for Terra Firma injecting a similar sum in new equity.

Many private equity firms are paying the price for the leveraged acquisitions they made during the buyout boom of 2005-07, while banks are unwilling to take further pain on loans they made in better times.

Servicing EMI’s debt to Citigroup is reportedly costing Terra Firma about £300 million per year. Citigroup is stuck with the entire debt package, having failed to sell off part of the liability to secondary investors.

The complaint also alleges that Citigroup undermined Terra Firma’s ability to manage EMI by fueling speculation about the music company’s financial health in an analyst note in October and by refusing to restructure its loans.

“Citi is trying to generate the conditions to make a covenant breach possible, possibly as part of a plan to take control of the company and sell it to Warner Music Group,” Sherman explained.

The Financial Times quoted the head of an unnamed rival private equity firm saying Terra Firma has nothing to lose because “there has been nuclear war between the two sides for two years.”