Dirty tricks alleged in $8.9b EMI sale

Lily Allen is on the EMI label. Photo / Richard Robinson

Guy Hands, whose Terra Firma Capital Partners paid US$6.7 billion ($8.9 billion) for EMI at the height of the buyout boom in 2007, says he was tricked into overpaying by a Citigroup banker.

Hands is going to try to prove in a trial beginning today in Manhattan that Citigroup's David Wormsley lied to him when he said that Cerberus Capital Management planned to submit a competing bid for EMI, the 113-year-old music publishing company whose recording stars have included Enrico Caruso, the Beatles, Miles Davis, Radiohead and Lily Allen.

Terra Firma claims US$8.3 billion in damages, saying it would have paid less for EMI had it known that Cerberus wasn't going to bid.

In the meantime Queen, Paul McCartney, and the Rolling Stones have all quit the label, while the company slipped from a profit of £86 million ($1.8 billion) in 2006 to a loss of £1.57 billion in 2009 and £512 million in 2010.

The suit has been interpreted as a move by Hands "directed at putting pressure on Citi to bring them to the table to renegotiate the financing of EMI," said Claire Enders, chief executive officer of Enders Analysis, an entertainment industry research firm based in London.

Citigroup, which provided US$4.3 billion in loans to finance the acquisition, says Wormsley didn't lie to Hands and didn't even know that Cerberus had decided not to bid.

Terra Firma based its bid on its own estimate of EMI's value, not on any statements by Wormsley, according to Citigroup.

"Terra Firma's allegations are categorically untrue," Citigroup said.

"Citi and Mr Wormsley have treated Mr Hands and Terra Firma at all times in a forthright and honourable fashion. We look forward to our day in court and are confident that we will prevail."

Terra Firma's key witness will be Hands, 51, who claims he had three telephone conversations with Wormsley between May 18 and May 21, 2007, as the deadline for bids on EMI approached. According to Hands, Wormsley told him that Cerberus, which had withdrawn from the auction, planned to bid £2.62 a share.

Terra Firma claims its bid of £2.65 a share was based on its desire to beat the non-existent Cerberus bid.

Enders said the EMI transaction was "immensely overvalued" and that the company has "bumped along from one short-term financial crisis to the next" since the sale. Hands has tried unsuccessfully to persuade Citigroup to come to an agreement that would reduce EMI's debt, she said.

"From the beginning, we have said this case was about fraud committed by Citi and we have strong evidence to support our claims," said Jonathan Doorley, a Terra Firma spokesman.

"We look forward to the commencement of the trial on October 18, when Citi will have to answer to a group of New York jurors."

Likely witnesses include Simon Borrows, chairman of Greenhill & Co; Cerberus Capital managing director Alexander Wolf; Chad Leat, chairman of Citigroup's alternative asset group; Paul Simpkin, co-head of European loans and leveraged finance at Citigroup; and Michael Klein, former Citigroup co-head of markets.

The suit was filed in December, more than two years after Terra Firma won the bidding for EMI.

US District Judge Jed Rakoff, who will preside over the trial, has twice denied requests by Citigroup to throw the case out entirely.

In March, he rejected Citigroup's argument that the case must be tried in the UK. Last month, Rakoff dismissed two of Terra Firma's legal theories, allowing the case to go to trial on claims of fraudulent misrepresentation and fraudulent concealment.

The parties told Rakoff that the trial may take as long as two weeks.

The Terra Firma legal team is led by David Boies, who represented former US Vice-President Al Gore in his unsuccessful litigation over the 2000 presidential election.

He's opposed by Citigroup attorney Theodore Wells, who represented former vice-presidential aide Lewis "Scooter" Libby on charges of obstructing a CIA leak investigation.

- Bloomberg