EMI And Citi Draw Battle Lines

If there’s going to be a last-minute out of court settlement, it will need to come very quickly, and most of the UK business papers have concluded EMI will face its U.S. bankers in a New York Court Oct. 18.

Terra Firma, the private equity firm that bought the major music label for £4.2 billion in 2007, has filed suit against Citigroup because it claims it was misled during the auction for EMI.

Some want to see Terra Firma win, which could put a spotlight on what they perceive to be the sharp practices of corporate bankers.

The world of corporate banking, particularly the institutions that have funded leveraged buyouts, will be frightened by the prospect of a Terra Firma victory. They believe that every private equity firm that subsequently discovers it’s paid too much money for a loss-making company will show up in court with a writ.

In the EMI case, the banks also face the potentially embarrassing prospect of Judge Jed Rakoff and a six-person jury hearing Terra Firma claim Citigroup had a strong motive to ensure the deal went through.

The media will detail how it earned £6 million in fees for advising the music company during the course of the sale and £80 million for financing Terra Firma’s bid.

Citi would doubtless prefer that internal e-mails celebrating the fact the bank earned millions from both sides weren’t read out in court.

The outcome of the legal battle may hinge on whether Terra Firma chief Guy Hands can convince the jury that Citi banker David Wormsley tricked him into buying EMI by falsely claiming a rival bidder – Cerberus – was still in the running.

Hands says he can show he and Wormsley had three phone conversations in the final days of the EMI auction, and claims that in all three calls the Citi banker told him Cerberus was planning to offer 262 pence per share and that Terrra Firma should bid 265 pence.

Wormsley is expected to say that one of the three calls never happened and the other two – both in the 48 hours before the deadline for bids – were not about the sale of EMI.

It’s a high-stakes game. If Terra Firma can prove Wormsley lied to clinch the EMI deal, it will severely damage Citigroup’s reputation and cost it a huge settlement payment.

If the court isn’t convinced Wormsley is guilty of any wrongdoing, Terra Firma’s ownership of EMI will likely be over before the end of the year.