Out Of EMI’s Hands

The future of EMI may be out of its owner’s control after the British label reported pre-tax losses of £1.75 billion and its accountants admitted they have “significant doubt” about its ability to carry on.

Guy Hands, whose private equity firm Terra Firma borrowed £4.2 billion to buy EMI in 2007, has written to investors asking them to put in another £120 million to avoid the bank seizing control.

Maltby Capital, the company Terra Firma set up to buy EMI, says it’s not confident it can persuade the required 75 percent of investors to back the fund raising.

If the investors don’t come to EMI’s rescue by the end of March, the company will be in breach of its loan agreements and US banker Citigroup – which is owed £2.6 billion – could decide to take control.

Even if the investors come up with more cash it’ll give Hands only a year’s breathing space to find a longer-term solution or EMI would likely breach next year’s covenants as well.

Matters are made worse by Hands suing Citigroup for tricking him into buying EMI, a charge the US bank has firmly rebutted.

The business itself hasn’t performed too badly and actually made nearly £300 million, almost double the £164 million it made in 2008. But it has plunged into the red because a £223 million interest bill negates most of that and there’s been a £1 billion writedown on the asset value of its music and publishing businesses.

It’s also had the cost of restructuring and Maltby has revealed that the pensions regulator has been called in because EMI and the company’s pension trustee have fallen out over how to fund a £200 million deficit.

Company auditors KPMG told The Times of London that uncertainty over the banking covenants “cast significant doubt” on the EMI’s ability to continue as a going concern.

It said everything hinges on securing the bank covenants but there’s no guarantee that investors won’t feel they’re being asked to throw good money after bad.

In the three years Terra Firma has owned the company they’ve already stumped up more than £100 million.

Regardless of whether Citigroup seizes control, it may well be that EMI – with a history going back more than 100 years – will no longer be in English ownership by the end of this one.