The Fate of EMI lies in Court
Since its inception in 1931, EMI’s illustrious history of rock icons and persistent innovation has made it an industry legend. However, even with a controlling market share in publishing, an artist roster that formidably holds its own on the charts, and a steady increase in revenue streams over the past few years, its future is anything but stable. Guy Hands is the Chairman of EMI’s parent company, French media conglomerate, Terra Firma. After acquiring the label in 2007 on loan from Citibank, Hands is now pursuing his lender in US federal court on alleged claims of fraudulence concerning the EMI purchase. Scheduled to last three to four weeks, the trial’s outcome could be the sole determinant in the future of EMI.
Monday, October 18th saw the beginning of the Terra Firma vs. Citibank court case in which Guy Hands sought a total of $11.1 billion in damages from Citibank. His demands began with a $2.77 billion compensation for losses, plus a sum three times that amount for punitive damages.
The controversy was ignited from a series of phone conversations that occurred between Guy Hands, and Citigroup Banker/ Advisor, David Wormsely regarding the EMI acquisition in 2007. Hands, who had long coveted ownership of the label, claims that he was told three times by Wormsley (who acted as an advisor on the deal) that Terra Firma could lose EMI to US private equity group, Cerberus, if it did not top their alleged bid of $4.11 per share. After submitting a bid of $4.16 per share ($6.7 billion), Hands discovered that Cerberus had never submitted their bid, leading Hands to believe that Wormsley –a long trusted friend- was milking the deal.
Citigroup and Wormsley denounce all of these accusations saying that, “the evidence in this case is overwhelming that Citi has done nothing wrong and we firmly believe that Citi will prevail in this case.” In actuality, the case lacks substantial evidence from both sides, relying heavily on the recollections of Hands and Wormsley’s phone conversations.
The acquisition couldn’t have come at a worse time for Terra Firma. On the eve of the 2007 credit crunch, collapsing markets and plummeting physical CD sales harmoniously conspired to reduce EMI’s value to an estimated $2.8 billion. This is a far stretch from the $3 billion that the company currently owes Citigroup, not to mention the $6.7 billion that was initially paid out in the first place. This suggests that over 60% of Hands’ original investment, along with most of the equity of Terra Firma has already been lost, leaving a crippled and indebted EMI dangling helplessly above the ravenous jaws of lawyers and jurors.
The case –which is currently being referred to as the trial of the century- holds the fate of both Hands and Wormsley’s (two of Wall Street’s most respected money men) reputations. While rumors have surfaced that Citigroup could opt for a debt-for-equity swap that could grant it a stake in the EMI label, Hands has made it clear that he has no intention of letting the lender get a say in the company’s operations. Still, an unfavorable outcome for Hands could result in full EMI ownership by Citibank.
Despite numerous attempts to settle outside of court, Hands is convinced that Citibank provided fraudulent financial advice and is clearly willing to take the accusation as far as it needs to go. “If you accuse someone of fraud, its really game over in terms of [refinancing] conversations,” he said in a recent interview. “It’s like putting a stick into a dragon.” The court’s decision –scheduled for early November- will almost certainly have a catastrophic effect on the losing party regardless of who it is. Terra Firma will likely go bankrupt defaulting on its loans, leaving EMI at the mercy of Citigroup. On the other hand, an unfavorable decision for Citigroup could see a total wipe out of the bank’s coffers to cover the punitive damages cost that could be upwards of $11 billion depending on the judge’s ruling. Either way, the decision is sure to have a significant impact on the future of EMI and the financial condition of Wall Street.
By Evan Kramer
