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    Terra Firma brought down to earth by EMI's woes

    emi.jpgGuy Hands' Terra Firma has admitted that there will be no quick fix for EMI as the private equity group set out in stark detail the financial and operational challenges facing the ailing music company that it bought in a highly leveraged £4bn deal just before credit markets turned, report Financial Times.


    New revelations about the former culture at the record company behind Katy Perry and Coldplay included news of a £700,000 annual taxi bill - the largest account with a prominent London cab company after three investment banks with almost 10 times as many staff.


    An annual review of Maltby Capital, the vehicle through which Mr Hands' Terra Firma owns EMI, showed that pro forma losses ballooned from £287m to £757m in the year to March 31, because of financing costs, asset writedowns and restructuring costs in the first seven months of its ownership. Group revenues fell 19 per cent but cost-cutting held the fall in adjusted earnings to just 5 per cent.

    Lord Birt, the group's chairman, said in a letter to investors that they may be struck by "the forthright presentation of problems and the absence of rosy assurances about the future". However, the report said that Mr Hands' private equity group remained confident that its investment would deliver value for shareholders and other stakeholders "over time".


    "EMI can not be turned around overnight," Lord Birt said, but he pinned the blame for its underperformance on a failure of EMI Music, its recorded music division, to tackle internal problems that went beyond the broader crisis in its industry. Highlighting "a culture where high expenditure [was] at odds with the challenges it faced", Terra Firma said 88 per cent of EMI Music artistes made no money for the company, the group lost £125m on new music in the year, and some salaries had been double market rates.


    Terra Firma added that EMI Music had shipped 20 per cent more compact discs than it managed to sell in the last two financial years, and returns of unsold CDs hit 50 per cent in April and May of last year. One former executive, who would not be named, disputed the idea that there was routine overshipping on such a scale. Former management had cut costs by £290m in the six years before the sale, the executive added.


    Terra Firma, Mr Hands' private equity group, also released new details about its £3.7bn debt load, showing that financing cost it £520m in the year. However, it argued that the terms of the debt meant it would have time to turn the business round. Maltby owed £2.62bn to Citigroup, which financed the buy-out but was unable to distribute the debt in chaotic credit markets. Terra Firma and investors brought in by Mr Hands accounted for £1.06bn of shareholder loans and a further £545m of equity.


    The group emphasised that Citigroup loans were subject to only one covenant, testing the ratio of debt on its stable music publishing business to "maintenance ebitda" - the measure of earnings before interest, tax, depreciation and amortisation, which fell 5 per cent to £164m in the year to March 31. The company's term debt does not have to be repaid until 2015 and mezzanine facilities come due in 2017. More equity could be injected in the event of a covenant breach, Terra Firma said.


    One industry consultant said, however: "The debt is impaired. These numbers are truly awful and show what a complete disaster of an investment EMI was." Injecting more equity would be "just good money chasing after bad", he added.


    Terra Firma said results for the six months to September 30 would show "a significant improvement" at EMI Music, returning it to its expectations at the time it bought EMI. Costs and charges would not recur at the same level, it added.


    EMI Music Publishing, which manages the rights to songs by Amy Winehouse and accounted for more than 100 per cent of the group's ebitda in the year before the acquisition, would require less change, it said. The group was on track to make £200m savings it had identified in EMI's £700m cost base, it added, although not all of its planned 1,500 job cuts would be completed until next June.


    The report confirmed that "dramatic" credit market changes had made it impossible for Mr Hands to proceed with a planned securitisation of EMI Music Publishing's catalogue or to make planned acquisitions.


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