EMI: Hands handed arse; tries to save face

It's been a while since we heard about Guy Hands, the man who borrowed large sums of cash to buy EMI and then discovered he wasn't very good at running a record label.

He's been in court this week, trying to blame his failures at EMI on CitiGroup, in a legal case which was basically Hands' Terra Firma going "waah waah, why didn't they tell us".

The fraud case was supposed to last into July - rather like Euro 2016 - but ended somewhat abruptly with a humiliating defeat - rather like England's Euro 2016.

Hands climbed down:

“Terra Firma confirms it unreservedly withdraws its allegations of fraud,” David Wolfson – standing in for lead QC Anthony Grabiner – told the hastily convened court. Terra Firma will also pay the costs of the US bank, likely to run into millions of pounds.

Hands, who had been claiming at least £1.5bn from Citi, had been questioned by the bank’s lawyer for the previous two days, and his evidence had been expected to last into next week. He had faced repeated questions about his recollection of events in 2007 when Terra Firma took over EMI just before the credit crunch and had been accused of having a “hazy memory”.

At one stage during his questioning of Hands, Mark Howard QC, representing Citi, said: “The problem is, Mr Hands, your story is shifting and it is impossible to reconcile these different versions.”

Much as EMI had relied on releasing poorly-conceived best of 'special edition' collections, Hands was trying to sell a bunch of remixes of old material, but the court wasn't really buying.

His case having crumbled underneath him, Hands was left trying to whistle a brave tune:

Hands, who was not in court, said the latest claim had been brought in good faith. “However, it has become evident that our documentation of the fast-moving and complex events, and memories of these events after nine years, are no longer sufficient to meet the high demands of proof required for a fraud claim in court,” he said.

“The matter is now closed,” said Hands, saying that the Terra Firma business he founded in 2003 was looking to the future. “We have an exciting portfolio of companies, a talented and experienced team, supportive and loyal investors and €1bn of capital to invest,” he said.

It's funny, isn't it, that he hadn't noticed he couldn't remember all that "fast-moving" stuff until he'd been taken to pieces on the stand.

And while Hands might believe the matter is closed, that isn't entirely true. Terra Firma have agreed to pick up all of Citi's costs. That Billion of capital might be whittled down a bit in the coming weeks.

Universal get more time

As the Universal takeover of EMI gets caught up in regulators' worries about monopoly, Citibank have offered Vivendi longer to complete the deal.

The cash was supposed to have changed hands by September; now, to give time for the company to work out how to offload enough parts to keep everyone happy.

Hilariously, Richard Branson is talking about buying back Virgin:

"Richard Branson and Virgin have been assessing how to get back into recorded music business for many years," said a spokesman for Virgin Group. "The potential disposal of Virgin Records by Universal Music offers a wonderful opportunity to recreate a dynamic independent label in the market."

For many years? He can't have been assessing how to get back into music for more than five years, as up until 2007 Branson was part-owner of V2. Which was, erm, sold to Universal.

(It's worth noting that when Branson founded V2, he only owned 5% of it; the rest was held by Morgan Stanley. I know, imagine a record label mostly owned by a bank. Crazy, huh?)

While it might be fun for Richard to buy back Virgin, the failure of V2 should be evidence enough that he doesn't have a magic touch. And V2 was founded in 1996, when the music business still bore a superficial resemblance to the one in which Branson thrived in the early days of Virgin. And while the Virgin Group had a retail network.

However much people might want to believe that Beardie back at Virgin Records is a Leno-returns-to-Tonight story, it's much more likely to be akin to that awkward couple of episodes where Bet Lynch went back to Corrie, look confused and was swiftly written out again.

Guy Hands tries to grab EMI back

Given his strategy when in charge of EMI was throwing money away down pointless black holes, it's not surprising that Guy Hands is intending to doggedly fight on to regain the corpse of the label.

He's now chasing a bee that thinks that maybe all the outstanding debts that Citi were calling in had, in fact, been properly serviced:

Hands believes that all payments on debt had been maintained up until Citi took control in February, although EMI was expected to break a test of its banking covenants at the end of the first quarter.

That seems like the sort of detail that Hands should (a) be certain about and (b) have been certain about back during the first test. If you're relying on EMI to flog your records or pay your royalties, you're going to have to hope that Hands just pisses his cash away on lawyers.

Welcome back, Koppelman?

Throwing his hat into the EMI-purchasing ring (or rather, hurling a hat underwritten by Apollo Global Management) is Charles Koppelman, who was - at one time - CEO of EMI.

Bringing together someone from the olden days and private equity? What could possibly go wrong.

There are a surprising number of people interested in the label. You suspect it's not so much the opportunity to release whatever Robbie Williams might turn in a couple of years hence that's the attraction.

Who will buy EMI?

Reuters suggesting no end of likely suitors for EMI, including Sony and Universal. If either of them take over the company, we'd be one step closer to the inevitable single-major world. It'd be a sad day, but at least it'd make things easier for the RIAA.

However, there are other organisations kicking the wheels:

Citigroup is keeping its options open as to EMI. The auction could include separate offers for EMI's music publishing and music recording businesses, or an offer for the entire company, three of the sources said.

The interested parties have signed confidentiality agreements to get access to EMI's financial information so that they can decide whether to put in bids for the company, which are expected in August, the sources said.

Potential buyers including Access, MacAndrews & Forbes, Sony and Platinum Equity have talked to investment banks about financing an EMI buyout, these people said.

Banks including Goldman Sachs, Credit Suisse and UBS AG have expressed willingness to finance a potential deal, two of the sources said. All the banks declined to comment for this story.

Suggestions that the winner will get to ride Damon Albarn like a pony could not be confirmed at time of publication.

EMI: One lot

More misery for Warners, as the New York Post claims that Citigroup won't be selling off EMI in chunks. It'll be the whole lot or nothing.

Presumably because Citigroup knows nobody would be interested in some bits of the business, so it's going to offload the offal packaged with the prime cuts.

Why is this bad news for Warners? As the company tries to sell itself, the attractiveness of the offer is based mostly around dreams of combining a chunk of Warners with a chunk of EMI; publishing to publishing, recorded music to recorded music, ass to ass. If EMI is sold a single entity, that's going to be harder to pull off, and thus the value and interest in Warners falls.

[via The Loyalty Firm]

Citigroup grab EMI

The Terra Firma dream is over: Citi have seized control of EMI in lieu of unpaid debts.

Naturally, Citi are convinced it's the best thing all round:

Citi vice chairman Stephen Volk said EMI now had a strong balance sheet and "the ability to invest in and grow its business".

"This is a positive development for EMI, its employees, artists, songwriters and suppliers. EMI is an iconic business and we are completely supportive of both its management and its strategy," he added.

Wow. The one thing you can say about EMI is that it's been poorly managed and pursuing a rubbish strategy for the last few years - otherwise it wouldn't have defaulted on its loans and been taken over by Citi in the first place. It's a bit like someone trying to rescue a drowning man and saying that they'd like the drowner to continue with the flailing and vanishing under water.

The Citi takeover does relieve some of the debt Terra Firma larded onto EMI - now the company just owes £1.2bn instead of £3.4bn. That's good news - now EMI is just lumbering under an unimaginable debt instead of an unconscionable one.

Citi will be looking for a buyer. Good luck with that, Citi. For the time being, EMI will be run by bankers who don't understand it instead of by financial experts who don't understand it.

Terra Firma is still considering appealing against the findings of the New York court which said that Citi hadn't defrauded them when helping the EMI sale. If they do, that might make it harder for Citi to sell EMI on until that question is settled.

Terra Firma continue to pursue lawsuit to protect valueless property

It's lovely of Guy Hands to give No Rock And Roll Fun a tenth birthday present, with a move that demonstrates everything the music industry has been doing for the past ten years: blaming someone else for its woes, blindly pursuing legal action that has failed before; tossing good money after bad; alienating the very people it needs the support of; having trouble with the twenty-first century and just generally showing an incapacity to move on. In fact, the story was only a Gennaro Castaldo short of a full house.

Terra Firma have filed an appeal against their defeat in the the lawsuit against their own bankers.

Now, it might be that there's grounds for appeal - although, to be frank, it sounds like Terra Firma have produced a list of quibbles rather than any major flaw in either judgement or process - but the appeal process could drag on for months and months. And every quarter, EMI is finding it harder to meet its financial obligations.

Doggedly fighting on might seem like a heroic action, but Guy Hands is standing in a burning boat arguing about who started the fire instead of calling the fire brigade. This is an act of vanity.

Guy Hands and the melting chocolate biscuit

The Citigroup v EMI trial wasn't a total disaster for Guy Hands. Sure, the jury took hardly any time at all to kick Hands' claims out of court, and it now looks inevitable that Citigroup will take control of EMI, and Hands' reputation lays in tatters.

But at least he managed to be humiliated in New York, so it won't affect his tax status. So that's a plus, right?

The case was never going to fly, and given that Citi could point to Guy Hands' close friendship with David Wormsley remained close even when Hands had twigged the banker had diddled him it was probably foolish to even start the action.

And that was before Guy Hands stood up in court and said actually, he didn't even recall much about being defrauded, now you ask:

Terra Firma Capital Partners Ltd founder Hands, pressing an $8 billion damages claim against Citigroup, also testified at trial in New York that he had no document to support his allegations banker David Wormsley lied to him in three phone calls about a rival bid.

During hours of tense cross-examination, Citigroup trial lawyer Ted Wells asked Hands: "The only thing you can remember is the conversation with David Wormsley and chocolate biscuits?" from a May 20, 2007 Terra Firma board meeting.

Hands replied: "That is correct, in detail."

He said he could remember "how close the plane was" at the meeting in an airport hangar on the English Channel island of Guernsey, but not the meeting details or documents.

He said he remembers being hungry and asking for chocolate biscuits to eat.

How on earth did Hands think this was going to come off well for him? Was he hoping that he could enter an empty Tunnocks Teacake Wrapper into the court to support his entire case?

Hands has done the remarkable in the current climate and made the world feel a bit sorry for a bank. Indeed, there was a juror who got special thanks from Michael Moore for constructing an anti-bank movie, and even then Hands couldn't find any support.

It perhaps says it all that the lead Terra Firma counsel didn't stick around for the verdict. He'd already moved on to the next thing.

Of course, it's not inevitable that Terra Firma will lose EMI. But given that it's struggling to keep afloat, and relying heavily on the kindness of its main creditor, dragging that creditor to court and calling it fraudulent might not have been the shrewdest move.

It's horrible for EMI, and the people who work for EMI. You know what's funny, though? Even after a half-decade of terrible decisions, it's unlikely Hands is going to suffer as much as those whose employment depended upon him.

Something to remember about the Citi-Hands trial

It's worth remembering that Guy Hands insisted on the trial taking place in New York rather than the more appropriate London, because if he came to London it would wreck his tax dodging scheme. (I know that technically he is avoiding rather than dodging tax - he's behaving legally, if unethically, but let's not pretend that he's just really clever rather than a greedy man who wants to avoid paying his share to the nation that raised him.)

EMI extend long, slow death a few more months

It's looking likely that Guy Hands has managed to just about scrape together the cash to keep hold of EMI for a little while longer. USD105million, all of which will go into the debt pit that Terra Firma has dug, and all of which just keeps the beast limping on until March next year.

Meanwhile, with the cash they can get going on feeding the debt, no word on what EMI intends to do for actual money. I'm sure there's a plan, though, right?

EMI decision day

Today's the day when Terra Firma will ask its investors to pour more cash into the mismanaged black hole of EMI in order to persuade Citi to let them keep going.

Citi will decide on Friday if they're going to call in the loans; Guy Hands and his team believe that investors have, in principle, agreed to let him spend more of their money while hoping that Robbie Williams might do something to save them all. This week, it's about getting written confirmation of that.

Meanwhile, Sony are rumoured to be tying a bib round their neck and getting ready to feast upon EMI's carcass:

Head of Sony Music Rolf Schmidt-Holz said: “We are in a position that allows us to seize every opportunity in the market – including EMI.”

Not good news for Hands, as Citigroup have already indicated they might reject Terra Firma's plans if they don't feel they're in the best interests of EMI. And a cash-rich alternative owner might tip the balance.

How is EMI's panic going?

EMI's suicide-to-save-self plan to give its American records business away to a rival, in return for enough cash to stop the bank taking it over isn't going well. Variety reports that Universal didn't offer the sort of cash EMI needs, and a sniff from Sony failed to turn into any formal talks.

Which is probably just as well, saving them the horror of this conversation:

Guy Hands: Here, Mr Bank Manager, here's the latest part of the loan payback
Bank manager: Thank you. How did you fund this?
Guy Hands: Well, I sold off the rights to the entire US catalogue business for five years
Bank manager: Right. Um... you know that business was part of the figures we used when we decided if we'd let you have a loan to buy EMI, don't you?
Guy Hands: Uh... I guess?
Bank manager: And the income from the US catalogue business was part of how we expected you to be able to pay back the loan?
Guy Hands: I... um, I suppose...
Bank manager: And now you don't have that income.
Guy Hands: Oh! But... um...
Bank manager: So it's unlikely you'll be able to pay the loan back next time.
Guy Hands: Well... uh, now you put it like that...
Bank manager: I think you're a bad risk. I'll get Mrs Lewinsky from credit to start calling in the balance on your loan. Good day, Mr. Hand.
Guy Hands: But... I got a kidney! I could sell a kidney...

EMI's plan B (or was it d?) flops

The last desperate push to keep EMI sort-of-independent seems like another fumble by the Terra Firma team: the Wall Street Journal reckons that Sony is about to walk away from negotiations to licence the EMI library in the US; Universal have already pulled out and Warners weren't talking to begin with.

EMI needs a lot of money in a hurry to service the stupidly large debt used to buy it. It doesn't seem to have any options left.

Guy Hands: If I can't have EMI, I'll smash it to pieces

As he struggles to try and stop Citi taking EMI from Terra Firma, a document emerges showing that Guy Hands proposed breaking up EMI late last year.

His vision? Split off the bit that makes money (publishing) from the bit that sucks out the cash (records).

Though Citigroup rejected the proposal, Mr. Hands wrote that "we believe that we are in agreement in relation to a number of the key components of an acceptable solution including the need to separate the two businesses."

Mr. Hands's proposal focused on fixing the financial structure of the two divisions, and didn't discuss operational strategies.

"So one of your kidneys is totally broken, our plan is to rip out the good kidney and give that to someone else. That way, at least your good kidney has a chance."

Still, all this interest in the future of the business must make interested parties delighted? Citi and Terra Firma suggesting strategies? Two heads are better than one, right?

Eh, Wall Street Journal?

A filling last week from Terra Firma shows the harm the tug-of-war over the business and the bad publicity surrounding the deal is causing. In an email to Mr. Hands in early October, EMI Music CEO Elio Leoni-Sceti wrote that in the first nine months of 2009, counterparties' concerns about EMI's stability caused the company to lose distribution deals that would have gen rated income of $13 million a year. "Not only are artists and artists' managers raising concerns but morale within the company has reached a low point," he wrote.

The guys at the Brits tonight in a sealed plastic tent? That'll be the EMI table.

EMIconmics

You hear a lot about how terrible it is being a record label these days - but they're still quite nice little businesses. In fact, if they started to spend less time trying to force the world not to change, they could have a happy life making hundreds of thousands of pounds every year.

Take EMI, for example. £300,000,000 earnings before tax and write-downs last year. Sure, it's not an oil company, but it's a nice business. Not even managed decline, is it? Manage the reinvention of the business, and you'd be fine.

That is, unless you did something stupid like loading the company down with millions of debt it barely has a hope of repaying. That sort of stupid.

What's that, Robert Peston?

EMI's results for 2009 will show that it generated earnings before interest, tax, depreciation and amortisation of around £300m.

Multiplying that £300m by six or seven - the standard valuation multiple these days - gives a notional value for the whole of the recorded music business of something like £1.8bn.

That's good, right?

Now EMI was bought by Guy Hands' Terra Firma private-equity firm for more than $8bn in the autumn of 2007 (note that I have now switched into US dollars)

That takeover was financed with of $3bn of equity, provided by Terra Firma and its backers, and with $5bn of debt, provided by the giant US bank, Citigroup.

And just a few months ago, Terra Firma put in a further $500m of equity.

So if the business is now worth £1.8bn, that is equivalent to $2.8bn at today's exchange rate.

In other words, then...

Which means that every single cent of Terra Firma's equity has been wiped out. It also means that Citigroup is facing a loss of more than $2bn on the loans it provided.

The total loss for Terra Firm and Citi together would be something like $5.7bn.

Of course, Terra Firma has a plan. You don't look at a company struggling under piles of piles of debt without coming up with a cunning plan.

However, to use the jargon, those covenant breaches [when EMI breaks its banking promises] can be "cured" if Guy Hands can persuade Terra Firma's backers to stump up £120m in the next month or so.

Ah yes. Put more money in to the company. That makes sense. Let's just hope nobody stops to notice that it would take EMI two years to actually earn back that £120 million.

Hands grand plan seems to be asking backers to fund an even higher wall for spunking cash up against. Who wouldn't fall for that, eh?

[Thanks to @alanconnor]

Citibank lining up suitors for EMI

It's a scene that will be played out many times this week - single people finding themselves suddenly being forced to meet others, chosen by their mothers or friends. Others who would "be perfect for you", who "has so much in common with you". Others who, clearly, they want you to hook up with. Whether you want to or not. Because, from your family and friends' point of view, any partnership is better than nothing.

It's happening to Guy Hands, too, with Citibank pushing Terra Firma in the direction of other companies, hinting that their money could be a great fit for EMI, and suggesting that the pair really should talk:

It has approached two private equity firms, Warburg Pincus in the US and EQT in Sweden, and the door is also open to Warner Music, which has long been viewed as a buyer of EMI, despite regulatory obstacles.

Failing that, Mrs Williams' son is back from university. He's studying to be a doctor. You could do a lot worse, EMI. You could do a lot worse.

Citigroup is starting to panic that EMI is going to default, which would leave them trying to run a record label. Hence the panic to find a suitor before that happens. Clocks are ticking.

Terra Firma looking for someone to blame

While they're desperately trying to find someone willing to invest in their business, Terra Firma are trying to shift the blame for their ridiculous investment in EMI. They're suing Citigroup for fraud.

Oh, yes:

British equity firm Terra Firma Investments has sued Citigroup Inc., claiming it paid a "fraudulently inflated price" of 4 billion pounds for EMI's label and music publishing interests in 2007 as a result of misrepresentations made by the lender. In the action, filed Friday in New York Supreme Court, Terra Firma claims to have lost equity in the billions of dollars as a result of its heavily leveraged purchase of the struggling music company.

The suit adds that Citi has "sought to wrest control of EMI by pushing it into, or to the brink of bankruptcy."

I'm sure that everyone was saying how clever Terra Firma were back when they were buying up EMI, detailing the wisdom of Hands and the shrewd investment choices they were known for making. Now, it seems, Terra Firma are trying to convince us they were like country schmoes, turning up and being duped by a naughty bank.

Sure, everyone hates banks and bankers, Terra Firma. But they also hate private equity groups. And a private equity group trying to claim it was bamboozled by a bank elicts very little sympathy in the real world, as your claim seems to consist of whining there weren't enough people to sack and assets to flog off to keep your profit levels aloft.

Still, good luck with seeking someone to put a billion quid into a business you're simultaneously claiming in court is fundamentally flawed. Let us know how that works out for you.

Guy Hands wants half a billion write-off

Ominous noises from EMI, with Guy Hands scrabbling to keep the company afloat. He's put in three hundred million of his own money, but wants Citibank to write off half a billion of company debt.

Citibank, you'll recall, is in trouble of its own, having had to be bailed out by the US taxpayer for $300 billion. So, effectively, Guy Hands wants the US taxpayer to fund Terra Firma's disastrous stewardship of EMI.

Does this mean that Hands believes in taxpayers sharing the burden when times are tough? Not quite - sure, he'd like some tax dollars to keep his company afloat. But when the hat was passed around UK taxpayers to keep the state going, Hands took a different approach, pissing off the live as a tax exile in Guernsey when the 50p top tax rate came in.

Despite, erm, apparently being so rich he can afford to throw another £300million in to the black hole of EMI. God forbid any of that cash should find its way into the NHS or schools.

Guy Hands tries to find people wanting debt

It's not the best of times to be trying to offload debt in a directionless company in a threatened industry. Indeed, Citigroup are finding it so difficult to come up with a chump - sorry, partner - to share its exposure to Terra Firma's EMI debt that Guy Hands is scrabbling around trying to find someone on Citigroup's behalf.

That would be people who weren't bothered about taking on debt to buy EMI before Terra Firma had had a year running it and who can't be persuaded by Citigroup that it's a good bet, then.