‘Geniuses’ If Not For EMI

Terra Firma investors would have “looked like geniuses” if they hadn’t bought EMI Group, company founder Guy Hands told the Super Investor conference in Paris Nov. 18.

In his first public speech since he lost his high-profile fraud case against U.S. banker Citigroup over the purchase of the English music company, he said he thinks the London-based private equity firm is still in position to raise another buyout fund. But he also said it wouldn’t be easy.

“EMI is where EMI is,” he said, admitting Terra Firma would “do well” to attract capital for its next investment.

He was reportedly applauded for telling delegates that private equity needs to return to its roots of “changing and building businesses.”

“We need to get back to the basics that made our industry attractive in the past, when we were first branded an alternative investment,” he said. “To move forward, the private equity industry in the West needs to accept that the industry will be returning to the norms of most of the last 20-30 years, and that the 2004-2007 era was an anomaly.”

It was at the end of that credit boom that Terra Firma paid £4.2 billion for EMI, an investment that has since shrunk to less than half that value.

Hands added that investors will likely have to expect less than the 20 percent return they’d become accustomed to.

“Looking at the prices that are being paid today for most private equity deals in the West, it’s difficult to see how returns on most of them can be anything other than mid teens at best and that is assuming a positive economic outlook,” he explained.

He gave no guidance over the immediate future of EMI, but rumours of Warner Music Group showing an interest are being doubted on Wall Street.

One unnamed New York-based portfolio manager told Digital Music News it’s doubtful if Warner could afford to buy EMI.
“One particularly acute problem is its own debt load,” he said, explaining that it’s unlikely to be able service EMI’s outstanding debts on top of its own.

Another analyst reportedly said Warner buying EMI is “a fantastical idea.”

What’s worse is share prices are falling and Standard & Poor’s recently downgraded Warner to “B+” level, or “four steps into junk” as the Wall Street Journal described it.

The UK’s Financial Times says in the interests of competition, it’s time a Warner-EMI deal was allowed by the monopoly authorities.

It said Terra Firma’s defeat in the Manhattan District Court has left it with four options. Either it can inject new equity to avoid breaching future loan covenants, sell parts of the company or pawn U.S. distribution rights to a rival.

It could also try to negotiate a settlement with Citigroup to avoid defaulting on the loan and allowing the bank to take control.
Most analysts assume Citi would write off only part of the debt in return for some equity.