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.