AN explosive court case brought by Guy Hands, founder of buyout house Terra Firma, against Citigroup over indebted record label EMI opens in Manhattan today.
Hands is suing Citigroup for up to £7bn in damages to cover equity lost since it bought EMI for £4.2bn in 2007, alleging that David Wormsley, a senior Citigroup banker and former close friend, misled him about another bidder to rush him into an inflated bid.
Hands specifically alleges that in three telephone calls made during May 2007, Wormsley told him rival firm Cerberus Capital Partners was interested and Terra Firma would lose the deal unless it bid 265p per share by 9am the following day.
Citigroup, which was also advising EMI on finding a buyer, offered to provide £2.6bn debt at short notice to fund the buyout. Hands says the bank made £92.5m in fees from the deal. Citigroup denies all allegations as “categorically untrue”.
Terra Firma has written down 90 per cent of the investment’s value since the financial collapse, but EMI is still burdened with $3bn Citigroup debt bound by strict loan covenants that forced Hands to raise a further £105m equity from investors in May.
Reports suggest the lawsuit is Hands’ attempt to push Citigroup to agree a settlement to swap up to £1bn of debt for equity or give the bank a minority stake in EMI in return for reducing the debt.
Terra Firma has reportedly been in talks with Citigroup for some weeks to halt the case in exchange for a settlement, though sources say a deal remains unlikely. Hands has tried to restructure both the size and terms of the debt repeatedly since 2007 but Citigroup has refused to renegotiate.
As EMI’s sole creditor, Citigroup would gain control of the music group if Terra Firma defaulted and rendered EMI bankrupt.
TIME LINE | TERRA FIRMA’S OWNERSHIP OF EMI
● May 2007: Terra Firma Capital Partners III fund closes at €5.4bn ($7.55bn; £4.72bn).
● 21 May 2007: David Wormsley allegedly makes three phone calls to Guy Hands encouraging Terra Firma to bid 265p a share for EMI by 9am the next day to close the deal.
● May 2007: Terra Firma borrows £2.6bn from Citigroup to buy out EMI for £4.2bn.
● October 2008: EMI posts a full-year loss of £757m.
● March 2009: Terra Firma writes down the investment by 50 per cent and its entire portfolio by 45.5 per cent.
● July 2009: Hands attempts to negotiate the terms of the debt with Citigroup.
● September 2009: Citigroup publishes an analyst report responding to Hands’ proposal to inject £1bn new equity into EMI if Citi will write off £1bn debt. It concludes that by rejecting the deal, Citi could force Terra Firma to declare EMI bankrupt and gain control of the label.
● 11 December 2009: Hands files lawsuit at the New York Supreme Court accusing Citi of tricking Terra Firma into buying EMI. Case seeks to recover “lost equity of billions of dollars” and damages.
● February 2010: Terra Firma proposes selling London’s Abbey Rd studios to reduce the debt. English Heritage designates the site protected.
● 25 March 2010: Citi’s bid to dismiss the US case, on grounds that the dispute should be heard in a UK court, is thrown out.
● June 2010: Hands raises £105m from investors to save EMI from debt default.
● August 2010: EMI achieves 2010 revenues of £1.65bn and a net loss after restructuring costs and fair value adjustments of £512m. It still has £3.04bn debt outstanding due for repayment between 2014 and 2017.
● October 2010: Court case opens in Manhattan.