EMI May Go For Quick Fix

Guy Hands may abandon plans to raise the £360 million he needs to ensure EMI sticks within its loan covenants until 2015 but instead raise the £105 million he needs to avoid the risk of losing control of the company by the middle of June.

Papers including The Sunday Times claimed Hands didn’t have time to put together the larger sum, which he had calculated to be enough to cover top-up interest payments until the loan is renegotiated.

However, it appears he already has sufficient investor support to plug the latest breach of the borrowing agreement with U.S. banker Citigroup.

Even so, Hands still needs to secure the support of 75 percent of the 200 investors in Terra Firma – the private equity firm he used to buy EMI for £4.2 billion in 2007 – before the new money can be accessed.

He needs to do that by May 14, the date Terra Firma must submit a “compliance certificate” to Citigroup showing EMI can meet the terms of its £2.6 billion loan.

If he fails to win enough backing from Terra Firma investors, he’ll have very little time to tap outside sources. The cash needs to reach Citi by June 11.

The Daily Mail reported Canada Pension Plan, one of EMI’s major backers, is one of the investors rumoured to have refused to put in even more money.

Terra Firma’s annual review reveals that another £223 million has been written off the value of EMI, which means the £2 billion or so that CPP and other investors pledged toward the 2007 buyout is all but worthless.

Hands, who is suing Citigroup because he claims it misled him into overpaying for EMI, said in court documents that EMI is now worth £2 billion less than the £4.2 billion that Terra Firma paid for it.

If Hands manages to get enough investors to throw in another £105 million to solve the immediate problem, the Times said it’s still likely that he’ll have to go back to them for the further £255 million needed to meet all the bank covenants until 2015.

As soon as Hands can secure some breathing space, new EMI executive chairman Charles Allen is expected to try to raise more cash by reopening negotiations to license the company’s American catalogue to Warner, Sony, or Universal.

The enormity of what’s gone wrong at EMI is highlighted by documents obtained by the Mail, in which Hands told fellow investors that the music company would be hugely profitable by now.

The papers reportedly reveal that Hands said EMI’s profits before interest and other charges would reach £452 million in 2009.

The trading profit was nearer to £298 million, although that plunged to a £1.7 billion loss after bank interest, writedowns and other charges had been deducted.

Hands’ predictions were made in September 2007, shortly after Terra Firma acquired EMI, when he was describing the company as an “exceptional opportunity” because investors would benefit from acquiring valuable assets that had been “poorly managed.”

He said he planned to sell EMI, float it on the stock market or recapitalise it by 2012, when he expected its music publishing arm to be valued at 20 times earnings and its recorded music arm at 9.5 times earnings. According to those earnings estimates, the current value of EMI would be about £9 billion.

Hands described the lending arrangements with Citigroup as a “favourable debt package.”

Since 2007 Terra Firma has slashed EMI costs, axing 2,000 jobs, and seen the departure of key artists including Paul McCartney, Radiohead and The Rolling Stones. Robbie Williams, Queen and Pink Floyd are others rumoured to be thinking about jumping ship.