As the drum beats toward a March deadline on billions of debt, the recorded music giant's owner and his lender begin their last dance
When the last note sounds over Guy Hands’ troubled reign at EMI Group, it will mark an end to one of the entertainment industry’s great financial misadventures.
With billions of dollars of debt on its books, the world’s oldest music company is on track to be seized and sold off after March — when owner Terra Firma, the British private equity giant, is expected to default on its loan with Citigroup.
The wily Hands yet could pull off a miracle and showhow sidestep an EMI default. But industry executives widely deem his loss of the music giant a near certainty.
And the jockeying on the sidelines is already under way, as such obvious potential acquirers as German media giant BMG, private equity behemoth KKR and Edgar Bronfman Jr.’s Warner Music Group are poised with checkbooks in hand.
It will be a huge setback for the 51-year old Hands, who founded Terra Firma in 2002 after trading bonds for Goldman Sachs and managing the a major finance group for Nomura Securities. (Still, on the brink of losing EMI, Hands has managed to lessen his own blues — it was reported on Friday that he collected $19 million in dividends from the well-portfolioed Terra Firma last year, according to British regulatory filings.)
EMI owns the world’s largest music publisher and a collection of record labels with a combined roster of 14,000 living and late acts that include current hitmakers Katy Perry and Lady Antebellum. It also owns the Beatles recordings, which at long last became available late last year on iTunes, creating a downloading frenzy.
Under Hands’ orchestration, Terra Firma bet more than $2 billion of investors’ cash — and borrowed about $5 billion from Citigroup — back in May 2007 to take over EMI, a public company at the time.
Even then, it seemed a bad roll of the dice, with the music industry in the midst of a decade-long slide. But more bad luck was coming: Slightly over a year after Terra Firma acquired EMI, the global economy collapsed and froze the financial markets where Hands had anticipated refinancing the debt.
In 2010, album sales industrywide sank another 12.9 percent, which reflected a 20 percent plunge in unit sales for the fourth year in a row. And every stream of publishing revenue — from licensing fees to royalties for recordings and performances — is either flat or declining industrywide.
Hands and EMI confidantes, none of whom were authorized to speak publicly on the sensitive matter, argue that EMI’s business is relatively thriving. “You should separate the capital structure, which is artificial edifice, from the business itself,” says one EMI official, contending, as others have before, that the music labels “are operating better than any major right now.”
According to a two-week-old internal financial report, the equivalent of profits for the music labels rose 15 percent in 2010, while EMI Publishing's rose 12.8 percent.
On the charts, EMI's acts, like Gorillaz, former Guns'N'Roses guitarist Slash, country act Lady Antebellum and Katy Perry have been doing very well in the last year. Perry had the best selling song of 2010 with "California Gurls," Lady Antebellum also grabbed six Grammy nominations and even old-time rockers Iron Maiden made the Top 5 with their "Final Frontier" album in August.
In Britain, Tinie Tempah was a big breakout act, with the album “Disc-Overy” debuting at number one and featuring four Top 5 singles. And of couse, the remastered albums from the Beatles, who are now finally on iTunes also, are global sales hits.
“It’s popular to knock EMI as a great disaster,” one Hands confidante told The Wrap. “But everyone in the world would cry out to have EMI's performance over the last three years in recorded music and publishing.”
Other industry executives, including former EMI honchos, say such talk is from people smoking an illicit leafy plant.
One rival, for example, notes that EMI's figures are unaudited. An ex-EMI man points out that the company has fallen to number three or number four from number one in market share in its home market, the U.K. In the U.S., it’s now the smallest of the majors.
A report by Billboard last week even added a sour note to the Beatles catalogue’s historic move to iTunes. EMI, Billboard suggests, pockets far less of the $1.29 per download for a Beatles classic than is fetched by record companies in the typical iTunes deal involving a super act.
And even if you assume that EMI’s internal numbers are legitimate, it still isn’t earning enough for Hands to cover interest payments and pay down debt enough to avoid violating loan covenants.
Instead, Terra Firma wrote down the value of investors' EMI stake to zero from more than $2 billion, and Hands had to go back to investors last year for another infusion of cash — over $150 million — to keep from defaulting on the loan. From all indications, now even those wallets have closed up.
Hands himself is as much to blame for EMI’s predicament as industry conditions, music insiders say. One former high-level executive excoriates him for firing seasoned music professionals and replacing them with music-neophytes from packaged goods and other non-entertainment industries. In the years since he and they arrived, the Rolling Stones and Paul McCartney, among others, have exited.
“If you look at the pioneers of business, they were music guys,” says Lance Grode, a retired music lawyer and entertainment executive who teaches music publishing at the University of Southern California Law School. “They knew what they were doing.”
In June, Roger Faxon, who has been with EMI for 16 years and running the company’s highly profitable music publishing arm for the past three years, was named to the newly created position of group chief executive – a move that might have been too little too late.
Meanwhile, Citigroup reportedly has written down the value of the loan by $2 billion. And it may be less than charitable in negotiating an out for Hands — understandable, considering Hands sued the bank unsuccessfully last year. In the courtroom battle, which ended in Hands' defeat last November, the private equity boss alleged that Citigroup had duped him into overbidding for EMI.
So what happens now to EMI?
Several scenarios already are evident. Private Equity powerhouse KKR and its music publishing partner, BMG, are hands-down favorites to land EMI Publishing. And Warner Music's Bronfman is the odd’s-on favorite to buy the recorded music business.
For Bronfman, it would be a sweet triumph after having lost EMI to Terra Firma in 2007.
According to published reports, Bronfman and KKR waltzed over to Citigroup last year to try to take EMI. But the song and dance fell short when Hands tapped his shareholders for more cash.
Soon enough, however, Hands can enjoy the sound of silence when Citigroup gives him the hook from EMI’s bandstand.