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As Citigroup takes control, what next for EMI?

By | Published on Wednesday 2 February 2011


So, for those of you reading the EMI saga in book form, today is a new chapter, and maybe even a new edition. Or at least the epilogue of the previous edition. Or maybe the prologue of a new one.

Anyway, as expected, Citigroup yesterday took ownership of EMI from Terra Firma. The holding company through which the equity group owned the music major – Maltby Investments Limited – was put into administration after failing to meet covenants linked to its three billion pound bank loan, and Citigroup took control of another Maltby business and EMI itself. Terra Firma, Guy Hands and all those tedious, slightly arrogant private equity types are out the door, replaced by some lovely bankers. It’s party time people, party time.

Once in control, Citigroup immediately agreed to restructure EMI’s finances and obligations to the bank, slashing the music firm’s debts from £3.4 billion to a mere £1.2 billion in return for 100% of the company’s equity. With in excess of £300 million also available to the music major in cash, coupled with relatively good financial performance on a day-to-day basis of late, this puts EMI in a relatively strong position, for the time being at least. Citigroup said it was happy with the management team that has been built around CEO Roger Faxon since he took over the day-to-day running of the whole EMI group last summer, and that he would be allowed to continue to pursue his current business plan.

Which is great news, right? The streamlined, more efficient, more effective EMI that has emerged from the quagmire of Terra Firma’s brutal but probably required cutbacks and headcount cull will be allowed to continue as normal, without the very gloomy clouds of that three billion pound debt above it. Thanks to the £4 billion cash injection Citigroup and Terra Firma kindly gifted between them, the British music industry has a leaner, fitter major player. And now Faxon can pursue his mission to integrate the different parts of EMI’s business so to transform it into one of those high-speed, fully-adaptable, multi-skilled music rights agencies of the future.

Except, how long is Citigroup planning on being proprietor of a music company? Surely the bank will want to sell it on quick pronto, splitting it up into at least two separate businesses if necessary, and who knows what any buyers might want to do?

Yesterday’s statements from both EMI and Citigroup made no reference to any sale, stressing that, for the time being, it was business as usual, except without the fear that must come with unsustainable debt. Faxon said: “The recapitalisation of EMI by Citi 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. With that solid footing, we are confident in our ability to drive our business forward”.

He continued: “We have already made great progress in meeting the challenges facing our industry. The closer alliance between our two operating divisions is already delivering impressive results on behalf of the creative talent we are privileged to represent. We have a clear vision for the future, a strong and committed management team, and now the right capital and financial structure in place to deliver successful outcomes for artists and songwriters”.

Citigroup Vice Chairman Stephen Volk added: “Citi today took ownership of Maltby Acquisitions Ltd, the holding company that controls EMI. In the process, the previously unsustainable debt load at EMI was reduced by 65%, leaving the company with a strong balance sheet and the ability to invest in and grow its business”.

Looking forward, he added: “This is a positive development for EMI, its employees, artists, songwriters and suppliers. Our objective is to have EMI perform its absolute best for our shareholders over time. EMI is an iconic business and we are completely supportive of both its management and its strategy. It is business as usual for everyone at EMI”.

But Roger Faxon admitted to Billboard last night that Citigroup would only be temporary owners of his company, saying: “It’s pretty clear that Citigroup will not sell CDs … it’s not a comfortable place for a music business to sit. It’s not compatible with their business. It is a financial services giant. In due course, we of course are going to get sold. But it will be an orderly and profitable process. Many other music businesses will also be sold in due course”.

But what does “due course” mean? What would be best for Citigroup shareholders “over time”, a quick sale that could bring in £1.6 billion now, maybe more if a bidding war could be instigated, or sitting on EMI for the time being hoping Faxon’s grand plan, coupled with general economic recovery, could bring in a bigger pay day down the line, covering at least some of the £2 billion the bank had to write off yesterday.

Of course, there have been rumours that Citigroup has been in talks with possible buyers for months. To summarise, the previously mooted options open to the bank other than keeping hold of EMI for itself in the short term, are as follows:

1. Sell the whole of EMI to equity group and BMG backers KKR. Whether it would be interested in the whole of EMI – recordings and music publishing – isn’t clear, though some have speculated it may be. Given BMG already owns Chrysalis, taking ownership of EMI’s publishing business might interest the competition regulator in the UK.

2. Sell the EMI publishing business to KKR and the EMI record companies to Warner Music. This has long been mooted as the most likely end result. Warner might need to sell some of its current assets to fund such a bid, and has already hired Goldman Sachs to review its options. Any merger of Warner and EMI would almost certainly interest competition regulators in Europe, and probably the US too.

3. Sell the EMI record companies to KKR and the publishing business to someone else, possibly the also acquisitive independent music publisher Imagem. While it has long been assumed KKR would be more interested in EMI Publishing – BMG having much stronger interests in songs than recordings – BMG top man Hartwig Masuch told Music Week late last year that EMI’s record companies were actually of more interest to him.

4. Sell the whole of EMI to either Sony Music or Universal Music, who would split up recordings and publishing and merge them with their existing respective businesses. This has been mentioned by a couple of City commentators in the last fortnight though seems unlikely, if only because this would pose big competition regulation issues.

5. Sell EMI back to Guy Hands and Terra Firma, who possibly reckon that Faxon’s grand plan – sans the three billion debt – will work and could ultimately enable them to claw back some of the £2 billion+ they have lost on their music business adventure to date. If it was to work, it could also repair Hands’ damaged reputation in City circles. Although this seems unlikely, there have been widespread rumours that Hands has already spoken to some of his backers about raising the required £1.6 billion, and that Citigroup – despite the acrimony that exists between the two companies – would consider an offer.

6. Sell EMI to a consortium of private equity players led by Terra Firma. As above, but with Terra Firma sharing the risk with some of its competitors.

7. Sell to Simon Cowell’s Syco business. Yes, even Cowell has been mooted as a bidder. This seems the least credible of the rumours, but who knows? Whether it would actually be Syco that would bid, or Cowell’s JV business with Topman owner Philip Green isn’t clear, possibly because this rumour is made up. Syco, of course, is half owned by Sony Music, so if it was to bid presumably all the regulator crap that would kick in if Sony itself was to make an offer would also apply.

8. Sell to Apple Inc or Google Inc. Neither seems likely, both probably realise their respective music operations are much more profitable if they can keep talent at arms length; investing in new bands in a risky business after all. But I’m mentioning it because some have long predicted one of the tech or web giants would ultimately buy up a major entertainment player.

9. Sell to some as yet unmentioned equity group. It is unlikely any single equity outfit would bid for the whole of EMI, but there remains some interest in the private equity community in music publishing rights, and EMI’s publishing catalogue is a goodun.

10. Sell to CMU. I can exclusively reveal that this rumour, widely reported by no one last week, is not true.

So there you have it, plenty of options. Most of the realistic ones involve either splitting up the EMI businesses, or merging EMI – as a whole or in parts – with an existing music company. None of which would allow Faxon’s stand-alone integrated music rights business plans to come to fruition. Which is a shame. On paper, at least, they are good plans.

As for any pending competition regulation nonsense that could occur with some of the above mentioned scenarios, IMPALA, the pan-European indie label trade body that put up a good if ultimately unsuccessful fight against the Sony BMG merger in 2004 has vowed to oppose any moves to merge EMI with one of the existing major players in music, by which I assume they mean Sony, Universal and, most likely, Warner.

Big regulator concerns about a combined EMI Warner have been raised in the past, though some argue that particular deal is possibly more likely to get past regulators now than five years ago because of changes in the wider economy, and the fact the big music companies can argue they are increasingly in competition with non-traditional competitors, including Live Nation, AEG Live and possibly Apple.

But IMPALA reckons the regulatory process in 2011 could be even more strict than in 2004. IMPALA Chair Helen Smith told CMU: “Some parties argue that the regulators would be sympathetic because of the economic climate, yet this ignores three vital facts. First, the regulatory landscape has completely changed. Second, all previous music mergers have proved that concentration is not the answer to the music sector’s ailments. Third, [smaller music companies] are already suffering not only because of the crisis but also because market access is difficult due to excessive concentration. All the concerns that we expressed in previous merger cases have been validated”.

She added: “In the current regulatory climate, it is difficult to imagine the EC agreeing to further concentration. Even an attempt to combine EMI/Warner would be blocked unless substantial remedies were put in place to counter the anti-competitive impact”.

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