We can work it out?

A new legal twist has given Terra Firma fresh hope that it can salvage something more from its long-running quarrel with Citi over EMI. Thomas Duffell reports

One of private equity’s biggest legal battles is back for ‘Round 2’: Terra Firma vs. Citi. 

Guy Hands now has a second chance to try and persuade a jury that his firm was misled in its £4 billion bid for EMI, the music publishing giant it de-listed from the London Stock Exchange at the height of the credit boom in summer 2007.

Terra Firma previously alleged Citi tricked it into doing the deal by providing misleading information about a potential rival bid from Cerberus Capital Management. A jury sided with Citi in the original trial in 2010, but an appeals court has now ruled the jury acted on instructions inconsistent with English law (under which the US court case is being tried). 

Originally the jury was instructed that Terra Firma must prove it had relied on “one or more misrepresentations” to make its bid for EMI. But the appeals judge ruled that the jury should only have had to consider whether Citi made any fraudulent misrepresentation related to the auction, and not if a misleading statement had ultimately led to the bid. To win its case at the retrial, Terra Firma will only have to convince a jury that Citi made a misleading statement.
Citi disputes that legal test, arguing it wouldn’t be reasonable to bid billions of dollars on the statement of one outside advisor. 

Terra Firma counters that under English law, if an alleged misrepresentation plays a “substantial” though not “decisive” part in the decision, it’s still cause for loss regardless of how many other factors affect the decision.
Citi declined to comment beyond its original statement saying the bank remains confident it will win any retrial, as it believes “Citi’s conduct in the EMI transaction was entirely proper” and Terra Firma’s accusations of fraud are “baseless”. Terra Firma, meanwhile, believes its position has been strengthened as the “jury instructions [are] now resolved in our favour” and the firm “expect[s] to prevail in any subsequent trial”.

Now a retrial has been granted, the potential upside for Terra Firma – recovering £1.5 billion (€1.8 billion: $2.3 billion), not to mention a little bit of face – outweighs any legal costs or further risk, sources say. But it remains far from clear how this next battle will end. 


A perfect storm

“Just about everything that could go wrong did,” Guy Hands tells PEI, just weeks after losing EMI. First Citi was unable to syndicate the loan out to other investors. Terra Firma, meanwhile, couldn’t syndicate out some of its equity. A planned securitisation of EMI’s assets stalled. The debt had been hedged to protect against currency risks in such a way that it grew in size. Falling multiples meant EMI instantly dropped in value as a business. “If only three out of five had gone wrong, we would have been fine,” says Hands.

Hands is adamant that after its bailout by the US government during the financial crisis, Citi wouldn’t have been able to help EMI even if it’d wanted to.

“Our naïve view when we went into this deal was that Citi was our partner,” he says. But after the government bailout and departure of chief executive Chuck Prince and vice chairman Michael Klein, “the people who took over the business wanted to shoot everything created by the former regime, which is not unusual in business. We were seen as the ultimate embarrassment in terms of what Citi had done. We had no friends left there and we became a lightning rod for the bank’s internal battles.”