TERRA Firma’s £2bn lawsuit against Citigroup, which it accuses of lying during its buyout of music giant EMI two years ago, had been in the pipeline for 12 months.
The private equity group led by Guy Hands finally decided to strike after Citi rejected a refinancing deal that would see £1bn of loans to EMI written off.
The move marks a sharp deterioration in relations between the two players, who once trusted one another in major deals, and means an amicable debt-for-equity swap for the beleaguered record label will now be off the cards.
In documents filed at a New York court on Friday, Terra Firma levels a series of explosive allegations at Citi and its top investment banker in London, David Wormsley.
The lawsuit revolves around the role of Citi, which ran the auction of EMI but also provided £2.6bn financing for Terra Firma’s £4bn bid in 2007.
Hands alleges that Wormsley misled him into thinking a rival private equity firm, Cerberus Capital Management, would make a bid for EMI. He says this factor pushed Terra Firma into a generous offer of 265p a share at the height of the M&A boom.
The court document claims: “Citi’s representations to Terra Firma were knowingly false, and were deliberately and maliciously designed to fabricate a false competitive landscape that would elicit a bid...”
Hands goes on to accuse the American bank of trying to drive EMI into bankruptcy so it can bring about a merger with rival Warner Music, suggesting Citi used an analyst note to talk down EMI.
EMI, which boasts a roster of stars including Lily Allen and Coldplay, declined to comment. Citi was unavailable for comment although it is understood the American bank will contest the action robustly. Terra Firma is seeking £1.5bn in lost equity plus punitive damages.
CITIGROUP HEAD OF INVESTMENT BANKING
GUY Hands’ personal attack on David Wormsley will fascinate the City. Affectionately known as “The Worm”, Citigroup’s rainmaker is known as one of the best investment bankers in London. With a string of deals to his belt – including the controversial £10.3bn sale of airports operator BAA to Spanish builder Ferrovial in 2006 – Wormsley is seen as dour but experienced.
He and Hands have a long history. Between 2000 and 2007, Citi raked in £136m fees for helping Terra Firma on nearly 20 transactions. The EMI deal alone netted Citi £92.5m.
A string of emails reveals the decisions that led to Terra Firma’s disastrous £4bn takeover of EMI, which was struggling under £1.7bn of debt.
Late on 6 May 2007, Wormsley wrote to Hands: “I have a debt team clear to talk to you.”
Meanwhile he emailed EMI to say he was “absolutely certain that I can deliver very serious added value in any discussions with Guy”.
Three days before the bidding deadline, on 18 May, Wormsley emailed Hands: “how is it going” [sic]. Hands replied: “thank you for your help. We are getting there but need to sort out covenants with your lending team.”
A weekend of intense phone calls followed. Hands’ account of these talks makes up the meat of his claim.