When the Deal goes Sour

Below is an article from the FT on the PE sponsored buyout of EMI. My highlight points are in red.

Terra Firma injects more cash into EMI

By Martin Arnold in London and Andrew Edgecliffe-Johnson in New York

Published: May 28 2009 23:05 | Last updated: May 28 2009 23:05

Terra Firma has been forced to inject more cash into EMI for the second time in six months, after the debt-laden UK music group behind the Beastie Boys and Depeche Mode missed targets imposed in its banking covenants.

Guy Hands’ private equity group injected £28m into EMI in March, according to a person familiar with the situation. The move signals that results for the six months to March 31 failed to live up to conditions in the £2.6bn in loans Citigroup extended to finance the £4bn EMI takeover in 2007.

EDITOR’S CHOICE

Cost-cutting and currency gains boost EMI - May-07

Terra Firma writes off half of EMI buy - Mar-02

A record year for British musicians overseas - Apr-05

The “equity cure” is larger than the injection Terra Firma had to make in September last year. Coupled with other investments in the business, it means that about half of the £250m raised for its Maltby Capital acquisition vehicle shortly after the deal closed has now been spent.

EMI and Terra Firma declined to comment, but the news comes amid revived speculation of possible bid interest in EMI after a recent rally in sentiment towards the music industry.

Warner Music, a long-time suitor for EMI Music and the only music major still publicy traded, has seen its shares rally from below $2 in March to stand at $6.52 yesterday, and raised $1.1bn in new debt last week after its initial $500m offer was over-subscribed.

Although there were contacts last year between Mr Hands and Edgar Bronfman, Warner’s chief executive, no detailed merger terms were discussed and there have been no negotiations this year, according to one person familiar with the talks.

In March, Terra Firma disclosed that it had written off half of its £2.3bn investment in EMI, acknowledging the likelihood of heavy losses on the investment. Citigroup has also partly written down the debt.

Earlier this month it said that cost cutting and currency gains had boosted earnings before interest, tax, depreciation, and amortisation from £51m to £163m in the year to March, which featured a best-selling Coldplay album. The unaudited figures did not disclose heavy restructuring charges or the cost of servicing debt.

The group added that it was on track to deliver £200m of cost savings, which are largely targeted at the more turbulent recorded music division, rather than the steadier music publishing business behind Duffy, Take That and Amy Winehouse.

The terms of Terra Firma’s borrowings mean that debt must stay within a certain multiple of earnings – a covenant tested every six months. If it does not, however, it can inject new equity to make up the difference. The principal on the loans does not need to be paid back before 2015.

Mr Hands handed over the chief executive title at Terra Firma in March but remains chairman, concentrating on investments and relations with investors.

Bidding and Private Equity Firms

For an interesting review of the bidding process by private equity firms, the Deal Blog reviews the bid for SumTotal, an enterprise software company.  You will normally have "No Shop" for private companies and for public companies a "Go Shop" provision apparently is not unusual. Note the economics, which we shall discuss later.

PE in China

Bloomberg reports that Gome, the largest retailer of electronic goods in China, is negotiating the sale of 20% of the Company to private equity parties, which include KKR, Bain Capital and Warburg Pincus. These three are very well-known brand names in PE world. For details, please go here--it is an informative article.

After reading the article, please consider the key issues of the deal.

Internet and Disrupting Money Management

Peer to peer money management? The web comes to fund management in a micro-sense. For more, look at this site.

State of Private Equity

Below comes compliments of the Deal Journal of the WSJ.

How worried are private-equity-fund managers that their investors might not be able to meet capital calls? Very, if the results of a new survey by Private Equity Analyst are any indication.

The Sources of Capital survey asked fund managers, also known as general partners, to rank how important a variety of characteristics of investors, or limited Partners, are to them. Of respondents, 84.8% listed an ability to meet capital calls as extremely or very important, second only to their desire that investors be long-time participants in the asset class, at 88%."

PE investors (LPs) issue commitments to General Partners when they enter a fund that they will provide capital to their deals as they are originated. The above suggests that the ability of some LPs to meet their obligations is suspect. 

PE Investment in Thailand

Lombard Investments, a buyout firm based in Bangkok, has purchased a stake in Thai retail operator Robinson Department Store Public Company Limited. For the press release go here.

What it Takes to be CEO

David Brooks commented on a study done on personality traits of CEOs. The key point:

(The study) found that strong people skills correlate loosely or not at all with being a good C.E.O. Traits like being a good listener, a good team builder, an enthusiastic colleague, a great communicator do not seem to be very important when it comes to leading successful companies. What mattered, it turned out, were execution and organizational skills. The traits that correlated most powerfully with success were attention to detail, persistence, efficiency, analytic thoroughness and the ability to work long hours.

So the above brought back to mind an interview done with Steve Ballmer, CEO of Microsoft. Ballmer was asked, "Fill in the blank: you want your company culture to be more _______? His response:

"Efficient. The right word is efficient. That’s the direction that every business leader is steering their company culture toward right now. Given the current economic climate and the uncertainty about how long the recession will last, this is a time when organizations need to do more with less, and Microsoft is no exception. We’ve made good progress, but for a company that has grown every year for more than 30 years, learning how to operate under more constrained circumstances is not always that easy."

As a customer/user of MSFT, I would disagree--pay more attention to detail on products --would be one key area to start. Their business is being disrupted at an alarming rate and (I think) you don't "efficient" your way out of the issue. I am sure the people at Google loved this answer.

The Fresh Air of Spain

If you should notice that your friend who has just returned from Barcelona is acting a little "off"--maybe a little slurred in his speech or unable to walk a straight line, the answer could be on this link.

Warren Buffett

so how do Warren Buffett and Charlie Munger (Vice Chairman of Berkshire Hathaway) see quantitative financial analysis?

According to Buffett: “If you need to use a computer or a calculator to make the calculation, you shouldn’t buy it,”

And according to Munger: "“Some of the worst business decisions I’ve ever seen are those with future projections and discounts back. It seems like the higher mathematics with more false precision should help you, but it doesn’t. They teach that in business schools because, well, they’ve got to do something.”

Deliberate Practice

If someone is really good at something--it is not genius but practice. This means a lot -- whether you are training employees (need to teach them how to practice and how to think about practice) to raising kids. This is the emerging wisdom. For further reading, go here.