EMI To Pawn Talent For £400 Million

Several outlets ran stories saying EMI will pawn its talent in a last-ditch bid to solve its cash problems, but Financial Times reckons the UK’s major music company may be embarking on a risky strategy.

The company, which is owned by Guy Hands’ Terra Firma private equity firm, is asking for about £400 million ($600 million) for a five-year distribution contract on its North American catalogue.

The FT points out that the deal would involve EMI having to open its books to a potential partner, including the usually closely guarded release schedules, and the company’s US bankers may be in a position to block the move.

EMI needs to raise £120 million by the middle of June if it’s to avoid breaking the bank covenants it made to Citigroup, which lent Terra Firma well more than half of the £4.2 billion it needed to buy the UK music company in 2007.

One problem with EMI mortgaging its US talent – particularly when big-hitters like Pink Floyd and Queen are said to be considering taking their back catalogue elsewhere – is that parts of Citigroup’s £3.2 billion loan were secured on its American assets. As such, the bank would have to approve any significant changes to the way they’re operated.

Matters are made worse by the fact that Hands is already suing Citigroup, claiming that the bank misled him into paying too much for EMI by failing to inform him that the only rival bidder had dropped out of the auction.

Hands believes Citigroup wants Terra Firma to fail with EMI because it would enable the US bank to take control and then cut its losses by hiving off what’s left of the company to Warner Music.

Warner is also reported to be reexamining possible bid strategies should EMI come up for sale, although it’s far from certain that wouldn’t raise the same regulatory issues it’s done in the past.

Various private equity groups are also reportedly preparing tentative bid plans for all or part of EMI.

The Sunday Times believes Warner, Sony and Universal are already in separate talks with EMI.

The paper reckons the British company’s earnings from the North American market are about £100 million per year and all three of the majors would become even more interested if the license period was longer than five years.

The pawning talent stories follow the surprise departure of EMI Music chief Elio Leoni-Scoti, whose resignation was announced March 10, particularly as he’d spent much of the previous month giving bullish interviews about his confidence in raising the necessary £120 million from Terra Firma’s existing investors. A few papers believe that strategy may have followed him out the door.

In the three years since Terra Firma paid £4.2 billion for EMI, about 90 percent of its equity value has been written off.

In New York March 4 US District Judge Jed Rakoff said he may need until the end of April to decide if Hands’ action against Citigroup should be heard in that city or in London, a ruling that may well have lawyers drooling on both sides of the pond.