Terra Firma’s Last Throw Of The Dice

Unless there’s a last-minute out-of-court settlement, the battle between EMI and its U.S. bankers was due to open in  Manhattan District Court Oct.18.

Terra Firma, the UK private equity firm that bought the English music group for £4.2 billion just before the credit bubble burst in 2007, is seeking to show that Citigroup misled it into paying too much.

U.S. District Judge Jed Rakoff will likely hear evidence that amounts to two people’s conflicting reports of their telephone conversations in the week prior to the sale of EMI, a deal that Terra Firma chief Guy Hands and his team referred to as “Operation Dice.”

Hands’ lawyers have submitted that Citi deal-maker David Wormsley led him to believe that he was competing against a rival to buy EMI, although at the time Wormsley was already aware that the rival had dropped out of the auction.

Terra Firma is believed to be seeking close to £7 billion in lost profits, compensation, and damages, although the outcome may create a precedent that could send multibillion-pound shockwaves through the global financial market.

Citigroup claims the telephone calls between Hand and Wormsley had nothing to do with EMI and that Terra Firma’s only reason for filing suit is a desperate reaction to the discovery that it made what turned out to be a disastrous investment.

After Terra Firma bough EMI, the recorded music market continued to decline. Despite stringent cost-cutting measures and improved trading figures, Hands has had to convince Terra Firma’s backers to plunge further millions into the company in order to meet its bank covenants with Citi.

If EMI wins the case, it could lead to other investors seeking billions of pounds in recompense because they feel they were ill-advised by whichever bank was funding their acquisitions.

The banks fear that every disgruntled loser will resort to the courts as a kind of retroactive negotiating position, hoping to improve the conditions of their loans.

Citigroup claims that’s the case with EMI and cites the amount of time – approximately 2.5 years – between Terra Firma buying the company in 2007 and when it first filed claim in the New York court in December 2009.

In the two days leading up to opening of the case, the UK papers had various versions of stories about Terra Firma and Citi trying to reach a settlement.

The Sunday Times said Hands wanted Citigroup to slash £2 billion from EMI’s debt in return for him dropping the case, while the Mail On Sunday reckoned any settlement would involve Citi swapping at least part of the debt for a large but minority share of EMI.

The snag with the Mail’s view is that Hands and Citi have previously failed to agree on the details of a debt for equity swap, and it seems more likely the only thing they’ll be trading is legal blows in a Manhattan court.