EMI: Top of the Miss Parade
We're about to have official confirmation of one of the biggest-ever losses on a private equity investment.
EMI's results for 2009 will show that it generated earnings before interest, tax, depreciation and amortisation of around £300m.
Multiplying that £300m by six or seven - the standard valuation multiple these days - gives a notional value for the whole of the recorded music business of something like £1.8bn.
Now EMI was bought by Guy Hands' Terra Firma private-equity firm for more than $8bn in the autumn of 2007 (note that I have now switched into US dollars)
That takeover was financed with of $3bn of equity, provided by Terra Firma and its backers, and with $5bn of debt, provided by the giant US bank, Citigroup.
And just a few months ago, Terra Firma put in a further $500m of equity.
So if the business is now worth £1.8bn, that is equivalent to $2.8bn at today's exchange rate.
Which means that every single cent of Terra Firma's equity has been wiped out. It also means that Citigroup is facing a loss of more than $2bn on the loans it provided.
The total loss for Terra Firm and Citi together would be something like $5.7bn.
So is the game up for Terra Firma and Guy Hands?
It will undoubtedly be in breach of the covenants or terms of the loans from Citigroup as of March, and will be continue to be in breach every time those covenants are tested each quarter for the rest of the year.
However, to use the jargon, those covenant breaches can be "cured" if Guy Hands can persuade Terra Firma's backers to stump up £120m in the next month or so.
Were they to provide the £120m, they would retain voting control of EMI and would prevent it from automatically slipping into the clutches of Citigroup.
Why would they want to pump more good money into EMI having provided quite so much money that wasn't just bad but putrid?
Well, to do so would provide their only chance of recouping some of their losses - on the assumption that EMI is over the worst and that the business will gradually recover.
Not that it's a total dud even now.
That £300m of EBITDA was sufficient to pay the £215m of interest on the debt.
That said, the bottom bottom line for 2009 looks horrendous: there's a net loss of something like £1.5bn, because of write-offs of goodwill and intangibles.
Which is no more than an accounting confirmation that Hands and Terra Firma paid far too much for this business, just before the global economy went bang.