Now That Citigroup Has Taken Over EMI, What's Next?


Citigroup's earlier-than-expected takeover of EMI Group and its recapitalization of the company's balance sheet effectively presses the fast-forward button on a resolution of the major label group's fate.

The bank had been widely expected to assume control of the company from British private equity firm Terra Firma, which bought EMI in 2007 for 4 billion pounds ($6.5 billion) and was expected to default on its Citigroup debt later this year. That hadn't been expected to occur until mid-2011.
 
But with Warner Music Group having recently retained Goldman Sachs to expore a possible sale of all or part of Warner, thereby threatening to rob Citigroup of potential bidders if it put up EMI Group for sale after Warner assets were acquired, Citigroup and the board of Terra Firma's borrowing vehicle Maltby Investments Ltd. evidently decided that they had to act now. Citigroup recapitalized EMI through a debt-for-equity swap, reducing EMI's debt by 65% to 1.2 billion pounds ($1.9 billion) from 3.4 billion pounds ($5.5 billion).
 
While Citigroup's describes its takeover of EMI as an acquisition, it's more likely that Terra Firma's 1.2 billion pounds in equity was all but wiped out, with Citigroup likely providing the private equity firm a token payment to gain control of the company early. The sharply reduced debt level gives Citigroup and EMI additional options. The restructured balance sheet will make it easier for Citigroup to syndicate EMI's debt -- that is, sell portions of it to investors, including other banks. That would enable Citigroup to recoup more of its investment without immediately selling EMI, according to an executive with Wall Street financial advisory firm. Even if Citigroup's expedited takeover of EMI was sparked by Warner's search for bidders, the lowered debt level enables the bank more latitude in its search for would-be buyers of EMI.
 
Still, the remaining debt is large enough that it would still complicate a  potential merger with Warner Music Group, which carries $2.4 billion in debt, including interest payments. The challenge of servicing such a massive debt burden would be further complicated by the question of which debt would be considered senior.
 
Another factor weighing against a Warner-EMI merger is the fact that Citigroup is widely expected to extract itself from the music business. A WMG-EMI Group merger would leave the bank holding Warner stock that would likely be accompanied by a period during which it could not sell its shares.
 
Meanwhile, Warner, EMI and parts of both are sure to attract the interest of other bidders, most likely private-equity investors and music publishers, including acquisitive players like Imagem Music and BMG, the Bertelsmann-Kohlberg Kravis Roberts joint-venture publishing company.
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