LONDON/NEW YORK Citigroup (C.N) on Tuesday swooped in to take control of EMI, a blow to the music company's private equity owner which had fought a long battle to keep hold of the debt-ridden label.
Home to artists such as Katy Perry and Iron Maiden, EMI has been the centre of a power struggle for months. The label had been suffocating under a burden of debt borrowed from the U.S. bank in a 2007 leveraged buyout by Guy Hands' Terra Firma.
To facilitate the handover to Citi, accountancy firm PwC was appointed as administrator. PwC said that appointment occurred after the Terra Firma investment vehicle defaulted under its loan facilities.
"A breach arose because of the sheer weight of debt and the prospect of that debt ever being repaid," PwC said. "The company directors acknowledged this default and sought insolvency protection," it added.
Under Tuesday's deal, Citi bought 100 percent of EMI's share capital. The bank cut EMI's debt by 65 percent from 3.4 billion pounds to 1.2 billion pounds through a debt-for-equity swap, EMI said in a press release. EMI has in excess of 300 million pounds of cash available, it said.
Citigroup, which provided 2.6 billion pounds of debt for the 2007 buyout, wrote off most of EMI's loans after the investment vehicle set up by Hands' Terra Firma defaulted.
The handover to Citi was earlier than had been expected. EMI had been facing a covenant test on March 31 and if it had failed that, it could have forced a handover to Citi.
The move tees EMI up to be sold again as the U.S. bank will likely not want to hold the music company for the long term.
A source familiar with the situation told Reuters Citi did not see itself as a long term owner but said it was in no rush to sell the business. It could place the company in one of its own private equity arms before drumming up support for a sale.
Terra Firma said in an emailed statement that it was "pleased that EMI's debt burden has been reduced through Citi agreeing to write down a substantial portion of EMI's debt."
The private equity firm had been informed that Citi was taking over and there had been a meeting between the parties, a source familiar with the situation said on Tuesday. The source did not want to be named because details of the matter were not public.
EMI's directors were able to take the steps to hand over the business to Citi as EMI could no longer sustain its debt load, the source said. The Terra Firma investment vehicle defaulted under its loan facilities, PwC said in the statement.
EMI's management welcomed Tuesday's change.
"The recapitalisation of EMI by Citi is an extremely positive step for the company," Chief Executive Roger Faxon said in a statement.
"It has given us one of the most robust balance sheets in the industry with a modest level of debt and substantial liquidity. With that solid footing we are confident in our ability to drive our business forward."
EMI, also home to the Beatles and Kylie Minogue, said it would continue under its existing management despite the change of control.
"EMI is an iconic business and we are completely supportive of both its management and its strategy," said Stephen Volk, vice chairman of Citi. "It is business as usual for everyone."
Terra Firma bought EMI in 2007 at the height of the leveraged buyout boom in a 4 billion pound leveraged buyout deal. Citi underwrote all the debt.
The deal was struck at an inopportune time -- weeks before the credit crunch. To prop up the business through the recession, Terra Firma was forced to inject extra capital into the music recording company. It later admitted the problems with the acquisition.
"If the EMI auction started two weeks later, it wouldn't have occurred," Hands said at a conference in 2009. "We wouldn't have bought it. We'd have 90 percent of our funds still to invest and we'd look like geniuses."
Making matters worse, the relationship between Hands and Citi soured to a point that Hands took Citi to court claiming he had been duped into bidding so much in the first place for EMI. Hands then suffered the humiliation of a legal defeat. He has appealed.
From the start, Hands had a fight on his hands with EMI. He rubbed members of the industry the wrong way, sacking thousands and telling artists they needed to work harder.
At a meeting held in central London to inform staff of job cuts in 2008, the burly and bespectacled Hands had to be escorted into the building by his advisers past jostling camera crews and employees.
A number of suitors could be keen on EMI.
The company has steadily improved in recent years, and its artists have been relatively successful in the United States and Europe.
Warner Music Group WMG.N, which has held a series of takeover talks with EMI over the last 10 years, is widely seen as the most likely suitor for the recorded division.
Those likely to be interested in the publishing division, analysts say, include the joint venture between private equity firm KKR KKR.UL and Bertelsmann BERT.UL, pension funds and Sony/ATV Music Publishing, a venture between Sony Corp (6758.T) and the estate of late pop star Michael Jackson.
"You would think they want to monetise their piece of EMI as quickly as they can but the counterforce to that is they don't want to liquidate at the bottom," said Bishop Cheen, a fixed income media analyst at Wells Fargo.
"It could be worth more over an acceptable period of time."