EMI Deal Hits a Sour Note (plus new Coldplay photos from Charlotte)

For more than a century, EMI Group Ltd. has survived waves of turmoil: the breakup of its top act, the Beatles; its firing of the Sex Pistols over unruly behavior; and a long-running merger standoff with rival Warner Music Group Corp, writes the Wall Street Journal.

But the storied record company is now facing a problem it hasn't yet been able to shake: the heavy debt from a leveraged buyout gone bad. Wounded by collapsing music sales like the rest of the industry, EMI was acquired in 2007 by British financier Guy Hands and his Terra Firma Capital Partners for £2.4 billion, or about $4 billion now.

Mr. Hands applied the buyout formula that worked when he acquired everything from British pubs to German service stations -- raising large amounts of debt and cutting costs aggressively, with an eye toward selling the streamlined business at a big profit. Mr. Hands figured a new tough-minded approach to the profligate music business could trump falling CD sales, according to public reports by Terra Firma.

Instead, the deal has boomeranged. Terra Firma has written down a large portion of its investment, and been forced to inject extra cash into EMI. Today, London-based EMI is working to prevent its recorded-music unit -- which has been home to Pink Floyd, Coldplay and Radiohead -- from going into default or requiring further cash injections, according to people familiar with the situation. Despite a decade of trauma in the industry, no major recorded-music company has defaulted on its loans.

Mr. Hands is pressing forward in efforts to alleviate EMI Music's debt problems. Earlier this year, he asked J.P. Morgan Chase & Co. to see if it is possible to raise money on the junk-bond market to pay off part of a Citigroup loan used for the acquisition, according to a person familiar with the matter. Blackstone Group LP is helping Terra Firma negotiate with Citigroup to try to restructure EMI's debt.

These days, EMI's recorded-music division, EMI Music, isn't generating enough profit to comply with a £950 million loan from Citigroup, according to people familiar with the matter. Mr. Hands's focus on financial efficiency succeeded in trimming waste and boosting operating income at EMI -- but clashed with a culture focused on pleasing performers. The resulting turmoil made it harder to recruit artists, EMI executives say. EMI's new signings virtually froze after Terra Firma's acquisition before rebounding somewhat recently. At the same time, some famous acts ditched the label -- like the Rolling Stones, who left last year, despite a personal pitch from Mr. Hands to Mick Jagger over lunch.

The situation has put EMI's management in the position of attempting to calm the nerves of artists. "EMI has been around for 120 years -- it will be around for another 120 years," said Roger Faxon, head of EMI Music Publishing. "It's a natural part of the business that it moves on from ownership to ownership over the course of a long term," said EMI Music's chief executive officer, Elio Leoni-Sceti, in an interview. He says changes introduced by Terra Firma should allow the company to grow amid the industry turmoil. "The diversification of revenue is the long-term objective," he said.

You can read the full exclusive interview here at Wall Street Journal online.

New photos of Coldplay at Verizon Wireless Amphitheatre, Charlotte, NC (7th August 2009):