Archive for: terra firma
Guy Hands’s Terra Firm may have to ask clients for triple the amount to keep EMI afloat until 2015.
Terra Firma plans to raise 360 million pounds ($551 million) by the middle of June, which would allow the company to comply with its covenants over the next five years, said the person, who declined to be identified because the information is private. The record label of Coldplay, Queen and Pink Floyd had previously considered seeking 120 million pounds, enough to meet obligations until 2011.
The private-equity firm has written down about 90 percent of its 1.5 billion-pound investment in the music company, which accounts for about a third of its fund, a person close to the matter said previously. EMI said yesterday it is preparing a long-term business plan to secure additional funds and the project will be completed by mid-June.
Guy Hands and his team at the high flying venture capital firm Terra Firma have been chewing sour grapes ever since their purchase of recording giant EMI for £2.4 billion. They have been in court with their lenders Citibank over bad advice during the sale of the label, and have been practically walking on water to meet the huge cash demand of the interest payments on their gigantic loan (although they stopped short of selling off the Abbey Rd. Studios to get a cash fix). Now they are again scrabbling around to find £120 million to plug a covenant breach on the same loan, and a deal is in the offing from WMG to buy the still-profitable music publishing arm of EMI, an asset it’s been coveting over the garden fence for decades. Any bid for the £1.2 billion publishing arm is probably going to be made after EMI have cleared or defaulted on their next interest payment, in the first case, making an offer to EMI and Terra Firma, and in the second, talking to their creditor Citi if the company goes into receivership.
It has been reported that Pink Floyd is currently in a contractual dispute with EMI. Members of Floyd are disputing a number of analog-to-digital extensions. “It was unclear whether record companies would be selling direct to the consumer or through retailers,” attorney Robert Howe noted, while also noting that the iTunes Store had not yet arrived at the time of the contract.
Howe is contesting moves by EMI to ‘unbundle’ music into a-la-carte singles, dismissing claims that de-coupling only applied to physical formats. Also under dispute is what royalty percentages should be assigned to new, digital formats. The case is being heard by the High Court in London.
EMI (actually it’s parent the Gramophone Company) bought the house atNo. 3 Abbey Road in 1931, at the bargain price of £100,000 (around £20 million in today’s money) and turned it into a custom built studio complex capable of recording a full orchestra. The first of such being Sir Edward Elgar conducting the London Symphony Orchestra in recording sessions of his music. It is one of two that the company own, the other being Capitol Studios in L.A., and is most famous as the namesake of the Beatles album. Now it is being rumoured that EMI are considering the sale of the studio to help meet the financial targets imposed by the massive loan that their owners Terra Firma took out against the value of the company.
Having admitted in the Financial Times that his investment in EMI has shed around £2 billion in value since the 2007 purchase, more information is being made public about the radical solutions that Terra Firma’s head has been considering – including splitting the company into it’s recorded music and publishing arms. This would have the effect of protecting the publishing arm in the event that EMI is unable to meet the financial requirements placed upon it by lender CitiGroup (with whom Terra Firma, EMI’s owner, is currently contending a lawsuit over whether or not they were lied to in the buying process). If the various stratagems that are being discussed can’t be enacted, and EMI fails to meet it’s responsibilities, then we will likely see the breakup of the massive record company into it’s constituent parts, or a merger into one of the other big 4 labels.
Since 1st August 2007, when Terra Firma bought EMI for $8,000,000,000 with a 90% approval from it’s shareholders, the bottom line on EMI’s financial reports is set to show losses of more than $1.5 billion dollars, despite Terra Firma and its allies pumping in half a billion dollars worth of equity. EMI managed to meet the covenants imposed on it’s debt by Citibank in January, but is highly unlikely to do so in the coming quarter-year reports without further funding from Terra and Co.
EMI’s earnings are equal to paying the interest on their loans ($215 million!), but if they can’t improve their financials they’ll be in danger of defaulting on their debt and having the company fall back into the hands of the lenders, Citibank. Of course, there is still Terra Firma’s lawsuit against Citi in the offing, claiming malfeasance on Citi’s behalf in handling the auction of EMI – One can imagine a lot of white knuckles and short words as the cheque for the interest payments is signed.
If the debt does turn bad, it seems likely that Citi would break EMI up for parts, the gem being the still-profitable publishing department. Such a move would drastically change the face of the mainstream music industry, particularly in the UK, where most of EMI’s artists are based. A lot of the big sellers would go to the other major labels, but the felling of one of the biggest trees in the wood would make a lot more room for independent labels to grow up from under.
Terra Firma has had some good news; despite the extremely sour grapes evidenced by their lawsuit against Citigroup for misrepresenting the level of auction interest in purchasing EMI, they’ve managed to pass both EMI and EMI’s publishing arm through the financial hoops that Citibank has imposed on them to meet the terms of the loan agreement that Terra took out to fund the purchase of the embattled record label in the first place.
However bleak last year’s SEC filings made EMI’s financial outlook seem, they are still obviously able to keep up their interest payments, although I’d suspect that their management won’t be enjoying the kind of bonus package that was delivered to WMG’s top dogs this Christmas.
As you may have read here on our blog Terra Firma are suing their advisors/lenders Citibank for perpetrating a fraud against them – essentially Terra are saying that Citibank mislead them about the amount of competition there was for the record label’s purchase, the benefit to Citibank being more than £92 million in fees and lending them £2.5 billion that they claim they didn’t need to borrow. The plot thickens when you realise that EMI was in a huge amount of debt to Citibank, among others and that it was in danger of defaulting on the debt if it wasn’t rescued by a purchaser. The specific accusation is that a Mr. David Wormsley, a Citi employee who was advising Terra Firma told a rather significant pork-pie in an attempt to prevent Terra from dropping out of the bidding for EMI, precipitating a ‘busted auction’ – something that would have massively decreased EMI’s stock price, and thus the value of Citi’s asset, as well as EMI’s ability to repay any value that was still outstanding in their loan from Citi.
These accusations may be coming from a party that is desperately trying to shore up a huge investment in a failing company (look at EMI’s previous 10-K’s for an idea of their year on year losses), but they are pretty frightening for the big 4 labels – file sharing may finally be on the wane, with big torrent trackers like Mininova and The Pirate Bay being forced to go legit, but costs at labels are still outstripping income, and copyrights on some of their biggest selling artists are going to begin running out over the decades to come: the first Beatles song will come out of copyright in the EU in 2012 (unless there’s a change in the law).
Apple, eMusic and some other download stores are breaking ground in making online music profitable, but there are indications that even iTunes market share is dropping – innovation is happening with streaming services like Spotify entering the fray with big-label backing, but the true form of digital music in the decades to come is as yet undecided. I wonder if EMI will be there to see the changes happen.
Like everyone else on Wall Street, and particularly in the music industry EMI is facing pressure from it’s creditors, and the outlook is not improved by the rejection of a recent proposal from Terra Firma (EMI’s owners) to pump £1 billion into the company, in return for Citibank (the sole major creditor to EMI) writing off a proportion of the £2.6 billion of the debt owed to it. Presumably this means that without a similarly radical solution, EMI is going to be facing issues maintaining liquidity or meeting it’s covenants (the agreements which govern the amount of debt it’s allowed by it’s creditors to operate with).
Even the upturn in their revenues, while encouraging, only represents a small percentage, and we’re not yet privy to their yearly report, which they’re holding off until after their talks with CitiBank have reached a workable conclusion. Looking at last year’s operating losses of -$258 million and a total loss (including things like amortisation and depreciation of assets) of -$757 million, the company is looking another thumping loss in the face, without much prospect of a return to the black side of the line in the short term (take a look at pg 33 of this report for the scary numbers).
Of course, as Digital Music News points out – there are more radical solutions to be considered: “One option is to simply liquidate”
As previously advised, Terra Firma has been in discussions with EMI’s lender. Until these discussions have come to a conclusion, it is not appropriate to publish an Annual Review of Maltby Capital for the 2009 financial year.
As already announced, EMI Music (the recorded music division) delivered a strong operational turnaround with EBITDA increasing from £51 million to £163 million for the year ended 31 March 2009.
EMI Music Publishing, the leading publisher of popular music, continued to deliver strong performance with EBITDA increasing from £112 million to £135 million for the year ended 31 March 2009. (via the EMI website)
[I'm not sure I agree that this upswing qualifies as a turnaround, in the face of their yearly losses overall...] If one of the big 4 were to fold under market pressure, what would happen to the rest of the industry? Collapse of the mega-label structure would surely spell anarchy in the music industry as a whole, but anarchy is good for change…
EMI is praying that Santa is generous this season as it stares down a major post-Christmas payment due on £2.7 billion in loans from Citigroup. UK analysts are warning that EMI must generate significant cash by March to meet its obligations, If not, Terra Firma, the private-equity which bought EMI for £2.4 billion and already added £10 million three months ago to avoid default could be forced to inject more funds.
