Citigroup Inc. has taken over debt-strapped EMI Group Ltd., closing a disastrous purchase of the music label by Guy Hands, founder of British private equity firm Terra Firma.
The foreclosure by Citigroup, EMI's main lender, brings the label of British acts such as The Beatles and Pink Floyd under American control until a new buyer can be found.
The takeover had been long expected, but came suddenly more than a month before Terra Firma Capital Partners Ltd. officially defaulted on roughly 3.4 billion pounds ($5.48 billion) of borrowings it took on to buy the label in 2007.
EMI's cash flow was hurt by declining music sales and the debt became larger than its assets. Terra Firma's equity in the company turned negative — much like a homeowner who owes more than the house is worth.
When restructuring talks between Citigroup and Hands became unproductive — and while they remain at loggerheads in a lawsuit — Citigroup pulled the trigger and seized control Tuesday in a move that was approved by EMI's direct managers within five hours, said Roger Faxon, chief executive of EMI.
"The discussions had run their course, and Citi decided it was time to move forward," Faxon said in an interview.
Citigroup's move eliminates some uncertainty over EMI's future, and restructures EMI by reducing its debt by 65 percent to 1.2 billion pounds. Citigroup booked a 2.2 billion pound loss, while Terra Firma saw its 1.75 billion pound investment evaporate.
The agreement leaves EMI, which also represents Lily Allen, Katy Perry, Coldplay and dozens of other acts, with more than 300 million pounds of available cash, enough to fund its operations, and a sustainable level of debt.
Faxon said free cash flow generated from its artists will be "substantially enhanced."
"We will be able to reinvest in our business just out of our normal cash flows, let alone the balance we're sitting on," he said.
For now, EMI won't have to be rushed into the arms of a financial savior, although companies like Warner Music Group Corp. and private equity firm Kohlberg Kravis & Roberts have been jockeying to buy the company.
EMI now has "the ability to invest in and grow its business," said Stephen Volk, the Citigroup vice chairman who will become the chairman of EMI's holding company, Maltby Acquisitions Ltd., in a statement. "This is a positive development for EMI, its employees, artists, songwriters and suppliers."
In its most recent public filing, EMI reported revenue of 1.65 billion pounds in the year through March 31, 2010. Earnings before interest, taxes, depreciation and amortization rose 14 percent to 334 million pounds as EMI cut costs by merging some operations of its publishing and recorded music divisions.
Uncertainty over its future was seen as a major distraction for EMI, which in recent years lost business from the Beatles' Paul McCartney and rock band Queen.
The takeover came after a jury in New York found in November that the U.S. bank did not fool Hands into buying EMI at an inflated price. Hands had testified that Citigroup dealmaker David Wormsley had misled him about the number of suitors for the label, while Citigroup said the accusations were an attempt to gain leverage in restructuring talks. Hands appealed the verdict earlier this month.
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