EMI: Start Spreading The News

No matter how much EMI tries to spread the good news, there isn’t enough to cover up the bad. Any reports of it making more money need to be qualified by the fact it still isn’t making enough.

Months after Guy Hands’ private equity firm Terra Firma pumped in £105 million to avoid EMI breaching its covenants with U.S. banker Citigroup, it’s evident that it will need to pump even more if the beleaguered music company is to pass future covenants.

Under the current covenants, it’s likely to be making penalty payments to its banker for the next three or four years.

“`Even though EMI generates more than enough cash to service the interest payments on its current borrowings, we need to address a set of banking covenants that tighten steadily over the coming years,” the company said in a statement.

The good news is that EMI has increased its global share of the recorded music market by 1 percent to 10.4 percent. Revenues for the year ending March 31 were up 5.2 percent to £1.65 billion and annual post-tax losses were cut from £1.57 billion at the end of March 2009 to £512 million.

Total company EBITDA rose 14 percent to £334 million, although restructuring costs accounted for £80 million-plus, with £184 coming from recorded music and £150 million from publishing.

Terra Firma directors argue that it’s in Citigroup’s interests to maintain the business as a going concern, given it’s now on a sounder footing and last year made an operating profit of £250 million. The problem is that trading profit turned into a £512 million loss, after interest payments and what seems like the perpetual writing down of asset values were taken into account.

Matters are made worse by a £167 million hole in the company’s pension scheme and what may amount to a £10.9 million payoff to former chief exec Elio Leoni-Sceti, who stepped down in March after holding the job for less than two years.

He had £1.5 million in cash and Terra Firma is saying another £9.4 payment is “an accounting nonsense,” claiming it’s the value of rights when they were granted in 2008. It says they’re now worth considerably less.

Hands’ efforts to renegotiate the £4.2 billion Citigroup loan, which Terra Firma needed to buy EMI in 2007, have all hit the buffers. His company has subsequently filed a multimillion-dollar lawsuit, claiming the bank misled Terra Firma during the bidding process for the only remaining UK major music company.

The case is scheduled for the federal court in Manhattan Oct. 18. What may be the best news for Terra Firma investors is that some UK papers are reporting both sides have agreed to start mediation talks at the beginning of September.