Citigroup, months after winning a bitter legal battle against Guy Hands' Terra Firma group over how the private-equity firm acquired EMI, yesterday seized control of the storied record label -- home to scores of acts including The Beatles, Pink Floyd and Coldplay.
Terra Firma has struggled to meet the terms and make payments on the mountain of debt built up to finance the $6.5 billion purchase of EMI in August 2007.
Citi is expected to immediately seek a buyer for EMI. With Warner Music Group's financial book set to hit the streets as soon as this week and EMI headed to the selling block, the No. 3 and No. 4 music groups in the world, respectively, are both firmly in play.
Along with seizing control of EMI, Citi also erased years of uncertainty surrounding the label by wiping out some 65 percent of EMI's crippling $5.5 billion debt load and recapitalizing the firm, leaving it with only $1.9 billion in debt and $484 million of cash on the books.
Now Citi faces a choice: begin a formal process of selling EMI or deal directly with the most logical buyers. These include Warner and KKR-backed BMG Rights Management, which has so far been an aggressive buyer of music publishing assets.
Surprise bidders are also likely to emerge over the coming weeks, say those close to the talks.
The big unknown for both EMI and Warner is whether they'll end up being sold whole or in pieces. Few buyers want the declining recorded-music side -- preferring the highly prized publishing assets, which throw off steady revenue.
In addition to putting itself up for sale, Warner is also exploring an acquisition of EMI's publishing business.
EMI had once tried to buy Warner.
The acquisition of EMI, albeit temporarily, by Citi puts an end to the company's longstanding British ownership. According to some close to the talks, Hands didn't go quietly.
Just this week, before Citi officially seized the firm, Hands was trying to get investors, including Simon Cowell's brother, to pour money into EMI to save it.
"It was like the last days of the Nixon administration," quipped one source, of the desperation of the players. Terra Firma lost $2.8 billion on its EMI investment, according to reports.
Even EMI CEO Roger Faxon wrote, in a staff memo released yesterday, that the battle between Terra Firma and debtholder Citigroup was at times an unbearable distraction. While rallying the troops about the company's future, Faxon added: "EMI will be up for sale -- just like it has been from the day Terra Firma bought it."
Hands had no option but to return the company to Citigroup because of a trigger related to the debt-to-equity ratio, according to a source close to the talks. It was previously believed that Hands had until March before he would breach debt covenants.
In a 2010 court battle, Hands alleged that Citi cheated him into buying EMI for a much higher price by falsely claiming there was a second bidder for EMI. Hands lost the case but is appealing the decision.
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