Guy Hands has put EMI’s troublesome tenure under Terra Firma down to sudden market changes and the timing of the deal – rather than his company’s strategy.
In an opinion piece on banking regulations written for the Financial Times, the Terra Firma boss remembers a time when money “poured into the private equity industry” and there was pressure to find ever larger deals.
“At Terra Firma we believed EMI presented a great investment opportunity, which is why we committed to it in May 2007 and underwrote such a high exposure to a single deal across two of our funds,” he says.
“We were confident that we would be able to sell down part of our investment to co-investors.
“No one knew that credit conditions would change so quickly and disastrously,” he adds suggesting that his was not the only firm caught out by the crash but, “because it was large and colourful, EMI became the poster child for failed deals.”
Hands expresses the belief that EMI could have been a good deal if the debt and equity market conditions had not changed so dramatically adding, “Our problems stemmed from the timing of the transaction not the strategy. Our view of the music industry’s overall market decline proved to be largely correct".
“As EMI’s subsequent performance has shown, our plans for transforming its operations were effective. Under our ownership, EMI moved from having an annualised negative cash flow of £150m a year to a positive cash flow of £250m a year, while at the same time EMI’s market share increased 13 per cent in an industry that declined by 15 per cent.
“However, the timing of the closing of the deal, in the second half of 2007, meant we were unable to syndicate or refinance the transaction, and Citigroup eventually took over the business.
Hands ultimately stands by Terra Firma’s EMI deal in the piece, although conceding: “the responsibility for what went wrong is mine. I had the chance to veto it but did not.
“We should have had in place strict rules restricting our exposure to individual deals and preventing cross-fund investment – as we do now,” he adds.
“EMI demonstrated to me the importance of having firm boundaries in place, irrespective of your experience. We are fortunate that we were strong enough to learn from our mistakes. It is crucial that regulators now ensure that the banks do the same.”
Regulators in Europe, of course, have another task on their hands at the moment as they scrutinise the latest EMI bid – a £1.2bn offer from Universal Music Group for the label’s recorded music arm. A decision on the proposed deal is expected any day now.
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