Market Signs Confuse EMI Backers

Investors are reportedly divided over whether to back Guy Hands’ plan to raise £360 million to prevent an EMI bank seizure.

A report in the Observer claimed the main problem for private equity Terra Firma, which purchased EMI for £4.2 billion in 2007, is a general skepticism about what the future holds for a music industry that’s been battered by illegal downloading and a collapse in CD sales.

Making matters more confusing for Terra Firma investors who haven’t made up their minds about whether to throw even more money into EMI’s seemingly bottomless pit are conflicting reports regarding the state of the recorded music business.

British Phonographic Industry figures released April 26 indicate the value of the UK market has risen for the first time in six years. It’s up 1.4 percent to £929 million from £916 million in 2008.

However, a somewhat bearish report from the analysts at financial services firm PricewaterhouseCoopers claims the global market is contracting at a 4.4 percent compound annual rate, falling from $9 billion in 2008 to an estimated $7.2 billion in 2013.

“Investors are being asked to make a leap of faith as they have already written down the value of their EMI holding to virtually zero,” one music business analyst told the Observer.

The Terra Firma chief needs £120 million to plug the shortfall in the loan covenants agreed with primary lender Citigroup and he needs it by the middle of June. Hands needs a further £240 million as a hedge against failing to meet future bank covenants.

The larger sum would also help fill in the shortfall on the EMI pension scheme. KPMG, EMI’s auditor, has warned that could range from £10 million to £200 million.

If he fails to raise cash, Hands risks one of his most high-profile investments being seized by Citigroup.

Other reports say that if current Terra Firma investors – largely U.S. and Canadian pension funds – balk at raising the £360 million, then Hands has lined up outside interests to provide the extra equity.

Hands hopes that investors will be encouraged by a new business plan by Charles Allen, the new executive chairman he’s brought in from ITV, in which the company will slice a further £100 million of its annual £500 million cost base.

Allen is also reportedly looking at the possibility of asset sales, with some analysts speculating it could offload its Japanese business for £200 million.

EMI recently failed to hive off its U.S. catalogue for £200 million as talks with Warner, Universal and Sony reportedly broke down.
Other worries for EMI investors include the company losing major artists. Paul McCartney has just shifted his solo back catalogue, which came on the back of Rolling Stones and Radiohead jumping ship.

Macca complained that he was treated like “part of the furniture.” Unconfirmed reports are that Pink Floyd, Queen and Robbie Williams are also looking to move on.

Another twist in the tale is Hands’ bid to rescue some of the £4.2 billion deal he struck with Citigroup to buy EMI by suing the U.S. banker for misleading him into paying too much for it. Citi vehemently denies his allegations.