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EMI: Top of the Miss Parade

Robert Peston | 15:29 UK time, Thursday, 4 February 2010

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?

Apparently not.

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.


  • Comment number 1.

    EMI is (was) a grand old company....responsible for the invention of the modern television system that we all use.
    It was also responsible for most of the radar systems that were vital to us all in the war.
    It was also responsible for the Beatles' success, and has been at the forefront of world music for 50 years.
    Technology is "sidelining" record companies (downloading etc), not to mention piracy.
    But EMI music still owns the copyrights to a massive, worldbeating catalogue.
    Records, tapes, CDs.....all fast disappearing, but the music lives on.
    Was this a simple case of "over-valuation of the business, without taking technology changes into account"?....who knows?
    Or was it a case of "too much City wheeler-dealing, and not enough focus on the music"?....who knows?

  • Comment number 2.

    Just like the business equivalent of negative equity, the fear of anyone with a mortgage and a memory....or more like greedy business men burning their fingers - how long before a rescue deal, new business model for modern times, redundancies, etc?

  • Comment number 3.

    Sounds like Terra Firma has turned out to be just Quick Sand!

    Yet another great company taken over by PE and loaded up with debt. This is now becoming an all to familiar thread for many UK based companies!

    Sad, isn't it!

  • Comment number 4.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 5.

    Loss is the new profit!

  • Comment number 6.

    Could anyone give us an overview of what commercial debt is, especially as it seems to be being used by Kraft in the Cadbury's takeover too. particularly, is getting money from a bank always straight borrowing (like I might do from my bank) or is it these sales of debt (which are somehow different from shares)that are referred to in some news articles? also is a company selling debt just like the government selling debt that has been in the news recently? I have read articles which refer to 'borrowing, debt and treasuries' and it's hard to know what they mean.


  • Comment number 7.

    3. At 4:27pm on 04 Feb 2010, freemarketanarchy wrote:
    Sounds like Terra Firma has turned out to be just Quick Sand

    If this all wasn't so sad, I would find this crack very amusing. Just checked out the chart-de-jour as well..looks like we are playing Greece in the final...

  • Comment number 8.

    EMI aside...I was just thinking how wrong I seem to have been so far. There isn't 3 million + unemployed in the official statistics, there isn't a far steeper drop in house prices, there isn't a mass sell-off of buy-to-lets, and there aren't the many attendant problems all this would entail: rampant job losses, ballooning tax deficits, and business meltdown.

    Why not?

    Historically low interest rates? Quanitative Easing? Increased overdrafts by government supported banks? Record government borrowing to sustain markets? Dispensation with regard to rules enforcing accurate reporting of losses in the banking sector?

    Would that cover it?

    By the way - this has to tighten at some point, but when are we going to be in a position to tighten? We HAVE to keep borrowing and spending now.

  • Comment number 9.

    When you boroow a little you have creditors..when you borrow a lot you have partners.

  • Comment number 10.

    #4. anoesis wrote: Chart du jour – sovereign risk

    It would be very interesting to see this graph overlaid with lines showing where the dots are in 2 years and 4 years. From what we know of the government plans to only half the deficit over 4 years starting 2011, we end up way past 100% quickly. How would we then compare to others?

  • Comment number 11.

    It has always seemed to me that the music business and the City make very odd bedfellows.
    The fortunes of music companies wax and wain so violently.
    Music firms are strange animals, having constantly to "invent" new products (every new artist and every new song is essentially a new product).
    The City is used to dealing with named, big selling, well established products.
    The rest of the business world might say that the music business is constantly dealing with prototypes.
    It's a dodgy game, in which EMI has been successful for decades.
    For every "smash" artist, there are a hundred expensive failures.
    Imagine if you were making beef stock cubes, and you have to invent a successful new one with a new label every 3 months, or you will fail.
    Such is the nature of the music game, and how do you set a share price for that?

  • Comment number 12.

    #4. anoesis wrote: Chart du jour – sovereign risk

    That chart is pretty meaningless. There is no obvious trend or pattern and apart from Greece being out on a limb and some countries having similar numbers it doesn't tell you a great deal.

    Are we meant to infer that because being in the top right is bad the Scandewegian economies are paragons of well-runness? Cos that's not what I've heard...

  • Comment number 13.

    I reckon EMI will be all right. Guy Hands is pure rock'n'roll.

  • Comment number 14.

    Looks like a rehearsal for UK PLC unless those in power get their collective fingers out!

  • Comment number 15.

    This seems based on the expected value of the recorded music business only. But didn't terra firma buy the publising too? The recorded music bit tends to be more risk with lower returns than publishing- so while robert's point that this is far from a good deal overall holds, isn't the 1.8bn value projection against 5.7bn overall a bit misleading?

  • Comment number 16.

    Believe me.....EMI records is worth what it is worth, but EMI MUSIC PUBLISHING is worth a fortune!

  • Comment number 17.

    It is interesting how people like to compare how this relates to the problems in other countries. When your house is burning down it really doesn't matter if or if not the same is happening to a house across town.Everyone is looking for a magic trick because they have no answers and no one wants to admit to the causes as people would need to be in court or explaining during election time.. The conspiracy of silence from the banks and financial services has cost everyone, yet they look down on the masses as being stupid for trusting them. Al-Qaeda wishes it could inflict the damage on the West the banks have done. Maybe water-boarding bankers would get to the bottom of this, the governments insist that it works...and that it is not a form of torture.

  • Comment number 18.

    Ah yes.. PE companies and their hedge fund chums.

    They create nothing new so are even less socially or strategically economically useful than banks.

  • Comment number 19.


    I think Terra Firma should dump (for whatever it can get) everything but the Music Publishing business - it really is as close to a 'licence to print money' as anything can be in the modern world, and will be a cash cow for generations to come...

  • Comment number 20.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 21.

    Comment 18 @weescamp

    "Ah yes.. PE companies and their hedge fund chums.

    They create nothing new so are even less socially or strategically economically useful than banks."

    Maybe true, but when they go bankrupt we don't have to bail them out....

  • Comment number 22.

    another example of the daylight robbery and fraud committed by the financial morons who are now busy shorting Greece Portugal Spain and Germany with their made up default swaps, the sooner this kind of thing is wiped out the better, Italy took the first step seizing accounts of BoA, The US stock market is being manipulated to stop its fall off a cliff , the earnings to price ratios are all skew whiff, Next on the list the UK will be held over a barrel by the markets , the vampires are not going to stop until they suck all the blood.

    until all the utilities and other things needed for basic living have been hocked off it wont stop because the cloaked figures know they will have all the power and money(whatever it happens to be then) to rule the world without armies or weapons, new world order you gotta love it

  • Comment number 23.

    OBAMA and Bernanke are featured in a movie-- about greedy hedge funds called "Stock Shock." Even though the movie mostly focuses on Sirius XM stock being naked short sold nearly into bankruptcy (5 cents/share), I liked it because it exposes the dark side of Wall Street and revealed some of their secrets. DVD is everywhere but cheaper at

  • Comment number 24.

    Another Company bought with borrowed cash. Is it the end for these city playthings. Almost every great company with a good asset base has been raped by the Vulture Capitalists, assets gone, sold on numerous times and then killed off (Read Woolworths) with debt being rolled around the merry-go-round or picked up by the British Taxpayer who have been the final mugs who hold the parcel when the music stops.
    Pub co's next, Portfoilio's of 5000 pubs valued in Zillions yet individual properties being sold and failing to achieve 50% of book value. When enough "Tenents" (read MUGS) go to the wall and the gravy train of tied sales becomes zero what is left except £billions of debt !
    Mad Mad world of "New British Business Model"

  • Comment number 25.

    Most of the music and film businesses have been taken over by accountants, because of percieved internal waste by the equity owners. They are potentially very profitable enterprises, however the accountants forgot that what makes them work is their product, which as Stevewo accurately said is temporary. the ultimate idea is to cultivate a cash cow with long life, that you can milk regularly (50-75 year copyright). However you have to continually invest along the way, as you can't predict what will work.

    The accountants instead focused on short term profits from low talent fashionable product, that had a shelf life of 1-2 years, rather than building up tomorrow's back catalogue for future profit. This coupled with a complete lack of giving the customer what they wanted resulted in poor cashflow, and asset base.

    Classic short term greed and money first attitude. Now where have we seen that before?

  • Comment number 26.

    With regards to selling the A&R part of EMI, and keeping the publishing arm - nice but this effectively limits the future income stream again. As copyright runs out, they lose their assets and income stream year by year.

    It would only work for a company that wanted a quick buck for the next 5-10 years max, then would be happy to trash the rest of the asset.

    Hold on, that sounds like work for a private euity company...

  • Comment number 27.

    Heh, I guess this is what happens when you fight the digital era rather than embrace it.

    Sucks for them, but, well, you know, they've had 15 years to wake up to the new reality of doing business as a content creator and ignored it like the rest of the music industry so it's hardly suprising.

    I don't have much sympathy then for what is effectively just incompetence and lack of foresight- an inability to get to grips with the digital age.

  • Comment number 28.

    This kind of frivolous play with huge sums of money makes one suspicious not only of the valuations and methodology of valuation, but the value of money itself.

    It serves to undermine the perception that value is inherent in money: if this paper can be thrown around like rubbish, then maybe it is rubbish.

    It is all indicative of looming currency crises.

  • Comment number 29.

    ..oh and iwinter #27 agreed completely.

  • Comment number 30.

    1 & 11

    The problem with the music business is that it concentrates on the business part of the name (which it does badly) and not on the music.

    They chase and prosecute fans for using P2P filesharing as a source of revenue, but in the name of copyright. Strangely though there are still dozens of illegal immigrants on the streets of London selling knock off DVDs and CDs unchallenged every Saturday. Take a look if you like, Kilburn High Road between McDonalds and Argos. I guess they don't get chased cos it's less profitable to do so!
    They would rather do this than address the simple fact that the public feel ripped off and are avoiding being fleeced.

    By way of example, look up any big movie of the past few years. Take a look at the amount it cost to make, the cost of the DVD when it first came out and the cost of the same DVD a few months later.
    Now look up the cost of the soundtrack or score on CD or download.
    Notice a problem here?

    In pretty much every single case, for any film, you will see a far higher investment in the movie than any CD- but the DVD will cost a lot less than the associated music disk.
    One could argue that per unit this is not the case. However, consider what number of units a gold selling artist would have had to shift to get that framed disk 20 years ago compared to now. Have we stopped liking music over the last generation? Of course not! So, is piracy the real reason for the drop in sales?
    I contend it is that very comparison on price between DVD and CD that is the real reason!
    Albums go up in price by comparison to films, so sales drop. Because sales drop, the prices go up further, and sales drop some more.

    I bought 97 DVDs last year online alone. Of these I wanted the score to no fewer than 14 of them. Not one of those CDs was at an equal or lower price to what I paid for the movie, so I didn't buy any of them.
    Does anybody see a flaw in the business model of places like EMI yet?
    The trouble is- they don't!

    The average artist who has succeeded in making it big earns less per sale of a CD or downloaded track than the manager that signed them up. Many who don't make it big get no income at all from their recordings, only debts for the time that they as a band were charged to use the studios. Left, right and centre artists are prevented from reaching the public by the big companies, not assisted.

    Skid Row didn't earn a single penny from 2 platinum selling CDs in the 90s, their only income was from their live performances.
    Hysteria shipped more copies in the first month of release alone than Thriller sold in two and a half decades, but officially it sold less units.
    The Cook Report demonstrated that the old method of calculating the charts was so open to abuse that they could get a fake artist into the top 20 without even printing as many singles as an honest band had to sell to make the top 100.

    Does anyone wonder why the music artists in the world don't trust and are abandoning companies like EMI? Or why EMI is unable to make the sort of profits that it used to expect?

    This poor management system and busniess model is not limited to just the music arm of the entertainment industry. Our local cinema now charges £7.90 (no, not in London, not super luxury seating and no I'm not kidding!) to see a film. Attendance is only high on Orange Wednesdays, and the management can't work out why!

    Fox cancelled Family Guy. Why? Because advertising revenue wasn't high enough from what it was showing during the breaks. It came back because DVD sales were so high that they alone put the show into high profit.
    So what did Fox do next? Cancelled it again! And once more a single exec with some foresight overuled the ones who couldn't see further than their noses to bring it back.

    These (and I'm being kind here) ivory towered loons in charge of these and sooooo many other companies are the reason why our economies are in such dire straights!

  • Comment number 31.

    After EMI sacked the Sex Pistols, it was downhill all the way...

  • Comment number 32.

    It has been a bad week so I apologise for these in advance.

    As the Beatles would say Guy needs "A little help from his friends".

    As Pink Floyd would say it is all about the "Money". Perhaps if the Private Equity investors hadn't acted like "Sheep" then EMI wouldn't be in this mess. Terra Firma "Set the controls for the heart of the sun" only to find that "The Great gig in the sky" induced "Brain damage".

    The Floyd are possibly one of the few parts of EMI still making some money.

    Another EMI artist Duran Duran would ask that we "Save a prayer" for EMI.

    I know i'll get my coat.

  • Comment number 33.

    Hands was hoodwinked into paying way too much for EMI, big music businesses like this are history. I would go and cry into my beer for Hands if the pubs weren't all closed thanks to one of his earlier deals.

  • Comment number 34.

    It's clear that the traditional record company business model has been comprehensively broken by internet downloading.

    I used to buy thousands of pounds worth of CDs every year. I can't remember the last time I bought a music CD. I am sure there are many millions around the world who have done exactly the same.

    Terra Firma bought into a sinking ship. The recession was merely the icing on the cake.

  • Comment number 35.

    This particular sausage factory has run out of pork.

    Shame they couldn't adapt to sell other, newer types of offal based product.

  • Comment number 36.

    Those who know the reality of the record industry guffawed when Hands charged recklessly into EMI and have been laughing at his naivity ever since. At least, we would have had the consequences of his amateur bungling not been so traumatic for EMI employees and artists alike.
    I'm afraid that EMI will lurch into even more financial dire straights in the coming year as many of their established artists find (contractual) reason to bail out of the company, as did Radiohead. Many of the historic, money making deals EMI struck were 'catalogue' or tape-lease deals, whereby copyrights revert to artists upon expiry (as with the music publishing company; as has been correctly pointed out above, EMI owns virtually nothing for life of copyright. Most deals are fixed term, and in many cases the catalogue reverts to the composer upon expiry, hence the desperate rush to exploit the Beatles before the various rights start to expire in the next few years).
    The reality is that EMI's business model is totally unviable in this changing world. Try as Mr. Hands might to find a profitable framework for EMI, the writing has been on the wall for a decade. And let's face it, if you were going to design a recording conglomerate in 2010, EMI would be the last blueprint to follow. Indeed, if you know the economics of the music industry you'd realise that it's better to invest in a launderette - it offers a far better return on investment with infinitely less risk (and a great deal more glamour to boot).
    There is NO way back for EMI. Far from it. Odds are that in a few years the name will only survive as a brand of cheap Chinese hifi.

  • Comment number 37.

    EMI is badly run and lacks vision. The business model is outdated.

    Terra Firma are traders, accountants and lawyers who fancy themselves as entrepreneurs. They are out of their depth in the music business.

  • Comment number 38.

    succinctly put & spot on, sizzler.

  • Comment number 39.

    has anyone actually been a successful investor in music in the past decade ? At worst Guy Hands got it wrong. I remain very positive that the company (EMI) will ultimately survive in whatever brave new world emerges for the recorded music business.


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