Scrapping Over EMI’s Remains

Given that the company valuation is now little more than half the £4.2 billion (now $6.5 billion) Terra Firma paid for it in 2007, it seems the U.K. private equity firm and its U.S. bankers at Citigroup may be fighting over EMI’s remains.

In the last three years Terra Firma has written down its initial equity valuation by 90 percent, according to the Financial Times.

It still looks as if it will be a bloody fight as Terra Firma chief Guy Hands is taking Citi to court, claiming it tricked him into overpaying for the final remaining U.K.-based major music company by failing to let him know the only rival bidder had backed out of the auction.

In November, Hands wrote to Citigroup proposing a “complete restructuring of EMI” based on a new enterprise value of just £2.2billion ($3.4 billion). That valuation may prove to be a benchmark if EMI fails to meet its bank covenants and it falls to Citigroup to seize control and hive off the business.

Hands’ proposal valued EMI Music Publishing at £1.46 billion and EMI Music, its record company, at less than £800 million.

It’s a move that could have ring-fenced the profitable EMI Music Publishing, thereby protecting that part of Terra Firma’s investment in case the loss-making record company breached its covenants on the Citigroup loans.

He also offered to raise £1billion of new equity if Citigroup would write off £1billion of debt. Hands’ letter is reported to have highlights his concern about “adverse publicity” if no agreement were reached with Citigroup before his EMI acquisition vehicle filed accounts for the year to March 3, 2009.?

It’s already too late for that and the accounts, published earlier this month, showed auditors had “significant doubts” about EMI’s ability to continue as a going concern.

Hands sued the bank when it turned down the offer because it said it didn’t have “sufficient value.”

Now Terra Firma needs to raise £120million from investors if EMI is to meet a covenant test mid-June, or risk losing control of the company to Citigroup.

“Not only are artists and artists’ managers raising concerns but morale within the company has reached a low point,” EMI Music chief Elio Leoni-Sceti told Hands, as the negative publicity built up and the messy financial tussle got even messier.

It’s Leoni-Sceti’s role to sell the idea of the £120 million re-funding to EMI’s investors, something he aims to do by promising further restructuring and cost cuts to a company that’s already shed about a third of its workforce since the beginning of 2008.

It’s still not certain where the legal battle between EMI and Citi will be held. Hands filed suit in New York but Citi wants the action moved to London, where most of the business took place and where most of the witnesses are still based.

It’s rubbished Hands’ claim that a London court case may jeopardize his non-resident tax status in the U.K., pointing out he’s entitled to spend 91 days a year in Britain and modern technology such as video links make it possible for to him to give evidence without setting foot in England.