Hands has begun telling his private equity firm’s backers to expect the worst as a result of negotiations over control of the record label, which has £2.5bn worth of debt owned by Citi and which has halved in value since he bought it.
Citi is expected to write off most of EMI’s debts in exchange for control of the company, which counts Coldplay, Lilly Allen and Kylie among the acts on its label. Under the proposals put forward by Citi, Terra Firma would keep a small stake in EMI but would lose operational control, leaving the bank able to conduct a quick asset sale in the new year. Private equity firm KKR and Warner Music are thought to be circling with KKR keen to take EMI’S publishing business and Warner keen on its recorded music business.
Last month, Hands lost a court case in New York in which he claimed one of Citigroup’s most senior bankers, David Wormsley, had tricked him into overpaying for the record label in 2007 by suggesting rival private equity firm Cerberus Capital was placing a bid for EMI, which was higher than Hands’ original offer.
In the end, Hands alleged, Terra Firna was convinced to up its bid to 265p per share valuing EMI at £4bn. However, much of that money was raised through a loan from Citi and when the record label began to run into difficulties Hands tried to renegotiate the terms of the loan. Having failed, he then took his bank to court to try to prove he had paid too much in the first place.
A spokesman for Terra Firma refused to comment on the current state of the negotiations only confirming that they had been taking place since Hands lost the court case.
Terra Firma has already written off £1.7bn in equity, which it committed to EMI when it bought the record label three years ago. Citi, meanwhile, has halved the value of the loan on its books.
EMI is expectd to pass a covenant test at the end of December but Terra Firma would have to invest a further £200m to retain control of the record label after June 2011.