Citigroup Tried To Grab EMI

Terra Firma’s legal attack against Citigroup was launched in response to the US investment bank’s efforts to get control of EMI, according to Financial Times.

Quoting “three people familiar with the negotiations,” the paper claims Terra Firma, the beleaguered UK music company’s private equity owner, went on the attack after Citigroup proposed a debt-for-equity swap that would have given it a majority stake.

Citigroup lent Terra Firma £2.6 billion of the £4.2 billion it paid for EMI in 2007, and the two have seemingly been at loggerheads over restructuring the loan ever since.

A week ago Terra Firma chief Guy Hands filed a $1 billion fraud suit against Citi, claiming it misled his company during the auction of EMI. Terra Firma also claims the US investment bank wants to force the sale of EMI to Warner Music.

Hands says he would have not offered a binding bid of 265 pence per share for EMI if he knew he was the only one left in the auction. He said he only did so because Citi told him a rival was outbidding him even though the bank knew the bidder had already withdrawn.

Other sources close to the auction are challenging Hands’ version of events and the substance of the Terra Firma writ. They say Terra Firma was not the only remaining bidder, claiming Warner Music reps were still conducting due diligence in EMI’s London offices when the winning Terra Firma bid was made.

The FT’s sources say the stand-off began with a letter from Citigroup in September proposing a debt-for-equity swap that would have given the bank a majority in EMI’s and given Terra Firma a share in the upside from restructuring the company.

Citigroup’s plan was to cut its heavy debt exposure over EMI. It claimed Hands’ company would have benefited from any increase in EMI’s value if it managed to make disposals to pay back part of the debt, or if earnings grew faster than expected.

The FT says Terra Firma rejected the proposal, which apparently offered little financial detail.

Citigroup then rejected a counter-proposal from Terra Firma, which offered to put £1 billion worth of new equity into EMI in exchange for the bank writing off £1 billion of the outstanding debt. Terra Firma has already written down its EMI investment by 90 percent.

Some analysts believe Terra Firma’s next move will be to hive off some of EMI’s assets to lower the debt. Some have suggested the recorded music company may have to be rescued by selling some catalogues from the more stable music publishing division.

The next covenant test on EMI’s debt is at the end of this month and the outcome may depend on record sales during the Christmas period.