The lender’s seizure had been widely anticipated, since debt-burdened EMI was facing another enormous debt payment in March.
Citi’s assumption of control sets up the almost certain purchase of EMI by another company — possibly Warner Music Group — at a fire-sale price.
Citi, EMI’s largest creditor, acquired 100% of EMI from Terra Firma’s holding company, Maltby Acquisitions. As a result, EMI’s debt was written down by 65%, from $5.5 billion (£3.4 billion) to $1.9 billion; the company has been recapitalized, with $484 million in cash available following a debt-for-equity swap.
EMI — which is helmed by chief exec Roger Faxon, installed last year after heading the company’s publishing arm — will continue under the same management. Citi vice chairman Stephen Volk takes over as the new chairman of Maltby.
Volk said in a statement that reduction of EMI’s “previously unsustainable debt load” leaves the company with “a strong balance sheet and the ability to invest in and grow its business.”
In his own statement, Faxon said the takeover and recapitalization is “an extremely positive step for the company. It has given us one of the most robust balance sheets in the industry with a modest level of debt and substantial liquidity.”
In an internal memo to EMI’s staff, Faxon acknowledged that a change in the company’s ownership was imminent: “(A) music company — even one as great as EMI — doesn’t exactly sit comfortably in a giant financial services company like Citi. So while Citi is clear that they are under no time pressure to sell, and that they intend to stabilize the business, there is no doubt that in due course EMI will be up for sale just like it has been from the day Terra Firma bought it.”
However, he vigorously denied that any breakup of the company’s label and publishing assets was being contemplated: “Let me say this as clearly as I can: Global Rights Management is the future, and it takes both parts of the business working together to achieve that future. I have no doubt that the best possible way to yield the highest value for EMI is to keep our businesses together in pursuit of our strategy.”
Citi’s seizure of EMI wraps Terra Firma’s control of EMI, which the private equity company bought for £4.2 billion (then $8.6 billion) in 2007 in what is now viewed as one of the worst business deals ever wrought in the music industry.
Steeply declining record sales and the crash of the international credit market in the immediate wake of Terra Firma’s acquisition left company CEO Guy Hands scrambling to meet loan covenants due Citi, which put up $5.5 billion of the purchase price.
Late last year, Terra Firma lost a lawsuit against Citi that was viewed by many observers as an endgame maneuver. A New York jury dismissed the equity firm’s allegation that Citi inflated the price of EMI by falsely claiming there were other suitors for the company (Variety, Dec. 5).
The lender now must weigh the inevitable offers for EMI’s music interests, which include such current acts as Lady Antebellum and Katy Perry and the catalogs of the Beatles and Pink Floyd, among others.
A New York Times story last month intimated that WMG had retained Goldman Sachs to explore both the purchase of EMI from Citi and a potential sale of some or all of its assets (Variety, Jan. 21).
WMG chairman Edgar Bronfman Jr. is said to have long coveted EMI. The two companies — the Nos. 3 and 4 music firms in the U.S., respectively, in 2010 – have exchanged several unconsummated merger bids over the years.
Together, WMG and EMI commanded just over 30% of total U.S. album market share in 2010, according to Nielsen SoundScan; industry leader Universal Music Group took nearly 31% of the market.
To placate regulators, a WMG acquisition of EMI would likely entail a selloff of WMG’s publishing arm Warner/Chappell Music; EMI operates EMI Music Publishing, the world leader in market share.
In the wake of EMI’s announcement of the Citi takeover, WMG’s share price closed up 5% to $5.49 on the New York Stock Exchange on Tuesday.
Another potential suitor for EMI or its publishing interests is BMG Rights Management, a joint venture of the German media giant Bertelsmann and equity firm Kohlberg Kravis Roberts, which has been aggressively acquiring music publishing interests in the last year.
Bertelsmann was formerly partnered with Sony in Sony BMG Music Entertainment; it sold its 50% stake in the music company to Sony in 2008.
(Leo Barraclough and Tom Lowry contributed to this report.)