EMI Back To The Begging Bowl
EMI Music needs to raise around £120 million to stay within its banking covenants, following the breakdown of talks to hive off the distribution of its U.S. catalog for £200 million.
The U.K. major’s last-ditch bid to raise money against its American distribution rights fell apart with various sections of the media saying that either the price wasn’t right, the timing wasn’t right or that U.S. bankers Citigroup – which is owed around £2.6 billion by EMI’s owners – would have likely blocked the deal.
It may not be the death knell for EMI, although Damian Reece – the Telegraph’s head of business – was moved to say: “To see an improving company, carrying such a great British name, being so kicked around by its supposed backers is sad indeed.”
The Daily Telegraph quoted unnamed sources as revealing the catalog talks broke down around lunchtime March 31, with new EMI chairman Charles Allen batting back offers from Sony and Universal by saying he wasn’t prepared to accept a deal “at any price.”
His other options would appear to be asking Guy Hands’ Terra Firma private equity group, which paid £4.2 billion to take EMI private in 2007, to fork out more cash.
Unfortunately, Terra Firma investors have seen their EMI stakes written down by 90 percent over the last two years and have already thrown in further millions to ensure it met previous bank covenants.
This time it’s understood EMI’s recorded music earnings are about £100 million shy of where they need to be to meet Citigroup’s quarterly net debt to earnings covenant. If Hands is in a position to sanction further Terra Firma investment in EMI and the bank covenants are met, the upside may be that the U.S. catalog talks could be revived as Citigroup wouldn’t be so strongly placed to block the deal.
His investors may also see the interest the catalog attracted from other global majors as a further upside, although the downside is EMI wasn’t able to strike a deal with any of them.
Rather than fearing Citigroup’s intrusion, it may be that Universal, Sony and Warner Music may welcome it. If the U.S. bankers were to foreclose on EMI, then its various assets could arguably be bought for less in any subsequent fire sale.
The issue is further complicated by the writ Hands filed against Citigroup in New York in December, which claims the bank misled Terra Firma into believing there was a rival bidder for EMI and lured it into overpaying for the company.