Court loss puts pressure on EMI

EMI Group, owner of the Beatles record label, may attract bids from BMG Rights and Warner Music Group after owner Guy Hands' defeat in a court battle raised speculation he will come under pressure to sell assets.

Warner and BMG Rights are among companies that have expressed an interest in buying EMI's publishing and recorded assets.

Warner, which abandoned a takeover for EMI in 2007, last year held talks to make a joint offer with KKR & Co. BMG, a music-rights firm owned by KKR and Bertelsmann, said it was interested in the catalogue in EMI's recording unit.

The label holds the rights to old songs from the Beatles, Pink Floyd, Deep Purple and Queen.

"We're confident it's the right time and we will use opportunities," BMG chief executive Hartwig Masuch said.

EMI, a 110-year-old record company, held talks with rival record labels and private equity firms earlier this year about selling off assets as its loan repayments neared.

If Hands' Terra Firma Capital Partners, which controls EMI, can't pay its debts, creditor Citigroup could seize control.

"The next breach of covenant, which is probably imminent, will lead to Citi taking over EMI," said Claire Enders, chief executive of Enders Analysis, a London-based music and entertainment industry research firm.

"There was no pot of money gained in this lawsuit."

BMG holds the rights to more than 100,000 songs, including Aerosmith's Walk This Way and ZZ Top's Gimme All Your Lovin, and has spent the past one-and-a-half years buying and licensing catalogues, mostly in the United States and Britain.

The company has a credit line in place with banks including JPMorgan Chase, Deutsche Bank, Bank of Ireland and Barclays with a commitment of US$250 million ($317 million).

A purchase of EMI would give it a company whose artists have included Frank Sinatra, Thelonious Monk, Snoop Dogg and Alicia Keys.

For Hands, EMI was the most high-profile deal of his career: He bet almost a third of his €5.4 billion ($9.5 billion) fund on the money-losing company. Terra Firma bought EMI at the height of the buyout boom in 2007.

He has had to convince investors to inject new capital after breaking covenants.

He testified recently that Citigroup banker David Wormsley lied to him during phone calls made the weekend before the auction for EMI, leading Hands' Terra Firma to overbid for the label. Terra Firma said it reserves the right to appeal against the jury's 8-0 verdict.

The verdict "will not help the confidence of artists and managers that have a future in the company," said Paul Brindley, chief executive of Music Ally in London, which researches the digital music industry.

Since Hands's 2007 purchase of EMI, Paul McCartney, Radiohead and the Rolling Stones have left the label, and Queen took its recorded music contract to rival Universal Music Group.

Terra Firma cut the fair value of its €2.6 billion EMI investment to zero, according to a February letter the firm's fund, TFCP III, sent to investors. The fund, which put 59 per cent of €2.8 billion it invested into EMI, owns 63 per cent of the company. A separate fund, TFCP II, owns 23 per cent.

Still, the label has had recent success with chart-topping releases by Lady Antebellum, Katy Perry, and Robbie Williams. It narrowed its loss for the year ended March 31 to £512 million, compared with £1.57 billion a year earlier.

"EMI has had a solid operational performance over the last six months, driven by considerable success in both recorded music and music publishing," EMI Group chief executive Roger Faxon said, acknowledging the court's decision

"The irony in all of this financial uncertainty is that the company is doing incredibly well," said Brindley.

"In the UK they are riding the crest of the wave and are doing well in the charts."

Questions remain over whether Terra Firma can raise more funds to comply with loan covenants, according to an August statement by Maltby Capital, EMI's holding company that's controlled by Terra Firma.

Last year, Terra Firma offered to inject £1 billion in EMI in exchange for a similar reduction in the debt.

Citigroup rejected the proposal because it didn't want to write off 40 per cent of its loan without getting a significant stake in the music company, according to unnamed sources familiar with the matter.

EMI covenants will probably be measured in the coming weeks, Enders said.

"That will take into the New Year to resolve what happens to EMI," she said.

"And unless there's a miracle on the financing front they will breach."

- BLOOMBERG