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It's a City adage: If you owe the bank £100 that's your problem. If you owe the bank £100 million, that's the bank's problem.
Those close to EMI, the music group, probably don't need reminding of it today. Having paid £4.2 billion for EMI in 2007, investors in Terra Firma, the private equity house controlled by Guy Hands, must find another £100 million to keep EMI going.
This is their choice: they're in for £4.2 billion so another £100 million seems neither here nor there; or they say “enough” to throwing good money after bad and try and claw something back from EMI going into administration and being broken up.
The company has a hugely valuable back catalogue and they could raise hundreds of millions by selling it. Unfortunately, they will not get anything like the £4.2 billion that Hands paid.
Of all the deals done in the last boom, EMI represents the high-water mark. It was right at the very end of the golden period; it was a price that took the breath away; and within weeks, the markets turned. It was the final hurrah of a period when private equity bosses seemingly could do no wrong.
But EMI was to suffer a double whammy. Not only did economies and consumer spending slump but music lovers stopped buying CDs. Free downloading took over and, along with its rivals, EMI struggled to cope.
Unlike the other firms, however, it was burdened by having to service enormous debt payments. That, plus the cost of turning EMI into a leaner, more efficient business, have left it gasping. Whether it's allowed to survive is up to the clients of Terra Firma.
The irony of the group's predicament is that EMI's underlying operations are not that bad. Its music publishing arm is unaffected. In recorded music, the company has been showng a marked improvement.
Despite efforts from competitors to prise them away, it's held on to most of its big-name acts. This week, EMI artists account for four of the top 10 positions in the US chart.
And, in keeping with the rest of the industry, EMI has found a way of making downloads pay. Under new chief Elio Leoni-Sceti, it's become more adept at packaging its music — such as making consumers pay premium prices for remastered Beatles gift boxes.
Meanwhile, Hands is pursuing Citigroup, the bank that was acting for EMI on the sale to Terra Firma and was also lending the private equity firm the money to buy it. He alleges Citi did not tell him other bidders had dropped out — hence his high offer. This legal battle royal is set to run and run.
Right now, Terra Firma investors must decide whether to pump in another £100 million or quit. Theirs is a very tough call.
