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EMI May Get BMG, Warner Bids as Hands Loses in Court

Monday, 08 Nov 2010 02:38 PM

EMI Group Ltd., owner of the Beatles record label, may attract bids from BMG Rights and Warner Music Group Corp. after owner Guy Hands’s 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 AG, said it’s interested in the deep catalog in EMI’s recording unit. The label holds the rights to old songs from the Beatles, Pink Floyd and Deep Purple.

“We’re confident it’s the right time and we will use opportunities,” BMG Chief Executive Officer Hartwig Masuch said in an interview Nov. 5, adding that there are currently no talks between the two sides.

EMI, a more than 110-year-old record company, held talks with rival labels and private equity firms this year about selling off assets as its loan repayments neared. If Hands’s Terra Firma Capital Partners Ltd., which controls EMI, can’t pay its debts, creditor Citigroup Inc. could seize control.

“The next breach of covenant, which is probably imminent, will lead to Citi taking over EMI,” said Claire Enders, chief executive officer of Enders Analysis Ltd., a London-based music and entertainment industry research firm. “There was no pot of money gained in this lawsuit.”

Terra Firma spokesman Andrew Dowler declined to comment on EMI’s future. Warner Music declined to comment on the matter.

‘Walk This Way’

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 catalogs, mostly in the U.S. and U.K.

The company has a credit line in place with banks including JPMorgan Chase & Co., Deutsche Bank AG, Bank of Ireland and Barclays Plc with a commitment of $250 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-euro fund on the money-losing company. Terra Firma bought EMI for 4 billion pounds ($6.5 billion) at the height of the buyout boom in 2007. He has had to convince investors to inject new capital after breaking covenants.

Losing Artists

He testified in recent weeks that Citigroup banker David Wormsley lied to him during phone calls made the weekend before the auction for EMI, leading Hands’s Terra Firma to overbid for the label. Terra Firma said it reserves the right to appeal 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 officer 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. Queen signed a deal today with Universal Music Group for its recorded music outside North America, leaving EMI Music after 40 years. Queen’s publishing rights will remain with EMI Music. Hollywood Records, a unit of Walt Disney Co., holds its U.S. recorded music contract.

Chart Success

Terra Firma cut the fair value of its 2.6 billion-euro EMI investment to zero, according to a February letter the firm’s 5.4 billion-euro fund, TFCP III, sent to investors. The fund, which put 59 percent of 2.8 billion euros it invested into EMI, owns 63 percent of the company. A separate fund, TFCP II, owns 23 percent.

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 pounds, compared with 1.57 billion pounds 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 Officer Roger Faxon said, acknowledging the court’s decision Nov. 4.

“The irony in all of this financial uncertainty is that the company is doing incredibly well,” said Brindley. “In the U.K. they are riding the crest of the wave and are doing well in the charts.”

‘A Miracle’

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 pounds in EMI in exchange for a similar reduction in the debt. Citigroup rejected the proposal because it didn’t want to write off 40 percent of its loan without getting a significant stake in the music company, according to people familiar with the matter, who declined to be identified.

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.”

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EMI Group Ltd., owner of the Beatles record label, may attract bids from BMG Rights and Warner Music Group Corp. after owner Guy Hands s defeat in a court battle raised speculation he will come under pressure to sell assets. Warner and BMG Rights are among companies that...
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Monday, 08 Nov 2010 02:38 PM
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