Time may be running out for Guy Hands, the British private-equity chief who bought EMI Group Ltd. in one of the last big deals before the credit crunch.EMI is entering a crucial phase. The music company needs to generate enough cash to satisfy its banker, Citigroup Inc., by March. And EMI needs strong sales over the holidays and early next year to revive its weak music division.
Both could be tough to achieve. EMI's CD lineup for Christmas, the busiest period of the year for music sales, doesn't look strong, with releases such as an album of new songs from Tom Jones and a Coldplay album that includes songs that didn't make it onto the band's last hit, "Viva La Vida."
Mr. Hands's investment company, Terra Firma Capital Partners Ltd., in March may have to inject additional cash into EMI to avoid default on a loan from Citigroup, according to people familiar with the situation. Citigroup has about £2.7 billion ($4 billion) in loans to EMI. Three months ago, Terra Firma put in about £10 million to keep EMI from defaulting on its loan, a person familiar with the situation said. It's unclear how much a new injection might be.
EMI is one of Terra Firma's largest investments. The private-equity firm agreed to pay £2.4 billion in May 2007, at the height of the buyout boom, for the storied but struggling company known for signing the likes of Robbie Williams, Queen, Iron Maiden and the Beatles. The firm raised £250 million last year for contingencies, which would be used if an injection of funds is necessary, people familiar with the matter said.
In a sign that the market increasingly thinks EMI could default on its loans, the price of insuring against a default by EMI is rising. It currently costs £931,000 to insure £10 million of EMI debt, up from £868,000 a month ago, according to data provider Markit.
That said, EMI's internal forecasts are that it will generate enough cash. EMI expects to generate £280 million in earnings before interest, tax, depreciation and amortization in the fiscal year ending March 30, a person familiar with the matter said. If it meets this target, Terra Firma will likely avoid having to inject more cash into the business, the person said.
EMI's finances have improved in recent quarters as the company has started shipping fewer CDs than it used to for each new album, reducing the number returned by shops unsold, people familiar with the matter said. And EMI's publishing arm, which licenses the rights to artists' music and lyrics, isn't dependent on Christmas sales.
As the music industry suffers from rampant piracy and other problems that have depressed sales, EMI is hurting more than most, losing market share to rivals. Terra Firma brought in new management and moved to cut costs, cutting staff and firing 1,000 unprofitable artists from its labels, which include Virgin Records, Capitol Records and Parlophone.
But fewer artists and a failure to release new, big acts appear to be hurting sales. Terra Firma's clamp-down on costs, which include making EMI executives pay for their own flowers, made it harder for talent scouts to hire new artists, former EMI executives said. The Beatles' songs, meanwhile, have never been released digitally, denying EMI a potentially lucrative revenue stream.
EMI has been losing market share in the U.S. and the U.K. EMI's share of album sales fell to 9.2% in the U.S. in the first three quarters from 9.7% a year earlier, according to Billboard magazine. Its share of the U.K. album market is 9.6% so far this year, compared with 25.7% for Sony BMG and 43.8% for Universal, according to Official Chart Co. Last year, EMI's share of the same market was 15.7%. The figures cover CDs and computer downloads.
EMI's new release slate for the first quarter, apart from new albums by country singer Keith Urban and English singer-songwriter Lily Allen, includes the little-known German singer LaFee and Pet Shop Boys, a band that had its heyday in the early 1990s.
The EMI deal was a huge bet for Terra Firma and Mr. Hands, 49 years old, who rose to prominence in London with takeovers of companies including German highway concession operator Tank & Rast and cinema chain Odeon. Mr. Hands in 2002 spun off Terra Firma from Nomura Holdings Inc., where he had been a banker. He previously had worked at Goldman Sachs Group Inc. Terra Firma says it has invested about €11 billion ($14 billion), mainly in Europe.
The EMI deal was troubled almost from the start. Terra Firma had been hoping to sell some of the equity to other investors, and Citigroup planned to offload portions of the debt, but the credit crisis squelched those plans.
Terra Firma has already written down its investment in EMI to 70 cents on the dollar. Citigroup, under pressure to reduce its own debt, considered trying to offload the bonds this quarter or in the first quarter of next year, but decided against it, not wanting to sell at fire-sale prices, a person familiar with the matter said.
EMI could raise more money by selling assets. EMI executives contacted at least two other music companies several months ago to discuss the possible sale of EMI's classical and jazz labels, including the Blue Note label, people familiar with the situation said. The discussions petered out after an EMI executive heading the negotiations was moved to another role, the people said.
