The long saga of Guy Hands' failed investment in legendary music publisher EMI has come to an end.
On Tuesday, EMI announced Citi had acquired 100 percent of the company’s share capital. Citi immediately recapitalised the company, slashing its debt load from £3.4 billion to £1.2 billion, leaving EMI with more than £300 million in cash.
Citi simply seized the company as EMI struggled to meet the interest payments on its debt. The other alternative would have been for Terra Firma Capital Partners to inject more capital into the company, which the firm had done in the past, but apparently wasn't willing to again.
Terra Firma acquired EMI in 2007 in a £4 billion buyout that was carried on the firm’s second and third funds. Citi committed to providing debt for the deal, but very quickly realised it would be unable to syndicate the debt.
EMI’s performance fell and Terra Firma struggled to adhere to covenants on the debt. The firm tried to restructure the company's debt load, including at one point offering to inject £1 billion into EMI in exchange for a debt reduction of the same amount, but Citi reportedly refused. The situation exploded into a sensational lawsuit brought by Terra Firma, accusing Citi of tricking the firm into buying EMI at too high a price.
A jury decided Terra Firma had not made its case, and ruled that the firm was not entitled to damages from Citi, leaving Terra Firma saddled with a company that, while experiencing some performance improvements, would continually struggle to service its debt load. The next covenant test was looming in March.
Terra Firma said in a brief statement: “Terra Firma is pleased that EMI's debt burden has been reduced through Citi agreeing to write down a substantial portion of EMI's debt.”
The firm did file legal papers giving it the option to appeal the jury’s ruling, though no appeal has yet been filed.
Citi is reportedly shopping EMI around and has received interest from private equity firms. One report in the Wall Street Journal said Terra Firma may be interested in buying EMI again, with Citi providing debt, though that could not be substantiated.
A Terra Firma limited partner said LPs would probably not let the firm re-invest in EMI, adding that the best outcome would be if Citi’s takeover of Emi was “the end of a chapter”.
The LP had some hope for Terra Firma’s Funds II and III. The €2.2 billion Fund II has been performing well other than the EMI investment, the LP said. Fund III, at €5.4 billion, is an open question, but has a good amount of dry powder to invest.