EMI Between A Rock And A Hard Place

He didn’t make it clear if he saw any direct comparison with EMI, but Guy Hands believes Britain faces a decade of “pain, social unrest and unemployment.”

The billionaire’s warning came April 7 in a note to his investors in Terra Firma, the private equity firm Hands used to buy EMI for £4.2 billion in 2007. It was sent out with an annual report that explained how they’d lost £230 million ($353.5 million) last year.

Hands says the UK will clearly suffer a long and painful period as it unwinds from the current level of leveraged debt.

“If it fails to clean up its balance sheet, the UK could find itself cast into a category with the weakest states in Europe,” he explained.

Terra Firma investors’ contribution to the UK’s leveraged debt is a result of the 2009 writedowns on the value of the UK’s only remaining major music company, plus the £1.38 billion ($2.12 billion) losses they suffered in 2008 – also largely due to the £4.2 billion buyout of EMI.

“Unfortunately, despite great effort, Terra Firma did not reach agreement with Citigroup on a restructuring of EMI’s debt during 2009,” Hands told investors.

Hands has filed suit against Citigroup, the bank that lent Terra Firma most of the money to buy EMI, claiming it misled him into paying too much money for the company. Citigroup denies any wrongdoing.

The case will likely reach a New York court in the autumn, which is hardly a conducive platform for further talks about restructuring the debt. The court will be looking at written submissions during the summer.

Those who’ve put money into EMI, and have seen the real value of their stake shrink by nearly 90 percent in a couple of years, know the only way to save the company is to throw in even more money.

Those who fund Terra Firma are stuck between a rock and a hard place. If they don’t put their hands in their pockets, Citigroup will be in a position to walk into EMI and start hiving off bits of the company to try to recover as much of the outstanding loan as is possible.

The UK business media is reporting that Warner Music and various private equity firms are talking to Citigroup and trying to cherry pick bits of the company.

Charles Allen, the former ITV boss who was brought in as executive chairman of EMI last month, is drawing up a new business plan for the music group.

He’s expected to have it ready for presentation to the investors – when he’ll also be trying to persuade them to cough up another £120 million – or face the prospect of EMI gong bankrupt by the middle of June.

“Nonetheless, EMI continues to be focused on driving further operational improvement,” Hands explained, pointing out how the credit squeeze is affecting the private equity business.

“Until the last few years, returns could be enhanced by continually increasing leverage. I am afraid that government attitudes to private equity are threatening to become destructive and punitive,” he said.

“However, given the current lack of credit, in order to generate real value private equity firms will need to generate real value and improve cashflows to equity by making improvements in the operations or corporate strategies of their portfolio businesses,” he said. “For those firms that can do this, there will be real opportunity.”

According to Preqin, a London-based private equity data provider, the value of global leveraged buyouts plunged to $50 billion in the first quarter of 2010 – down from a record $207 billion in the second quarter of 2007.