Terra Firma Loses Cases Against Citigroup: What It Means For EMI

A jury has ruled against Terra Firma lawsuit against Citigroup, ending the private equity's firm apparent hope for financial salvation in its EMI acquisition.

Terra Firma acquired EMI for 4 billion pounds ($6.5 billion) in August of 2007. As a result of the acquisition, Terra Firma was saddled with debt of 2.7 billion pounds ($4.4 billion), and EMI has been struggling to handle that load ever since.

Last December, Terra Firma filed a "hail mary" lawsuit, alleging that a Citigroup executive had fraudulently induced the private equity firm to make an inflated bid for EMI. Most industry observers saw the lawsuit as an effort to pressure Citigroup into agreeing to a debt restructuring.

But after 13 days of testimony, a jury deliberated for about eight hours before coming back with a verdict favorable to Citigroup.

In a statement, Citigroup said, "We are very pleased that the jury reached a unanimous verdict confirming what we have said from the beginning: that Citi and David Wormsley treated Terra Firma with honesty and integrity in the EMI transaction. The jury's verdict makes clear that Terra Firma's irresponsible accusations of fraud were nothing more than a misguided attempt to gain leverage in debt restructuring negotiations."

Terra Firma issued a statement too, reserving its right to appeal and would continue to focus on securing a financial restructuring of EMI with its creditor, Citigroup.

“We are disappointed that the jury found that we did not prove that we relied on misrepresentations from Citi which caused a loss to our investors," the company's statement said.

"We believe that this was an important action to bring and that we had a responsibility to our investors to bring it. We are hugely grateful for their support throughout this process."

The company also said that “EMI itself will continue to build on its track record of the last three years, during which time it has improved its market position, achieved tremendous success with its new and existing artists, and produced remarkable growth in cash profits.”

Where does this leave Terra Firma and EMI?

But now that all is said and done with the lawsuit, where does that leave Terra Firma and its ownership of EMI? It leaves the private equity firm exactly where it was before: between a rock and a hard place.

Terra Firma still has a large debt load from the EMI acquisition, now grown to 3.2 billion pounds ($5.2 billion) due to exchange rate changes and it will likely require another equity injection from investors at the end of its current fiscal year.

Earlier this year, the company injected 105 million pounds ($170 million) of equity into the company to cure a covenant violation, because it didn’t maintain an undisclosed ratio of total debt to earnings before interest, taxes, depreciation and amortization and cash-on-hand. In fact, it had been asking investors for a larger equity injection to keep the company stable through the end of its current fiscal year. But since that didn’t happen, it likely means that EMI will miss hitting that covenant again and will need another equity cure.

So it’s back to the old waiting game. For Citigroup, that means hoping that Terra Firma trips up the covenant and can’t come up with an equity cure so that it can take over the company. If that happens, either a Chapter 11 or a pre-packaged Chapter 11 would likely occur, resulting in Citigroup forcing out Terra firm, which means the bank would take over EMI in a debt-for-equity swamp.

For Terra Firma, that means holding on long enough that something, either a more favorable economic environment that allows them to refinance debt or a huge hit or hits that generates enough revenue and profits so that it can avert violating the loan covenants. Or it can hope that Citigroup comes back to the table with some of its past offers, which sources say, have included debt-for-equity swaps that allowed Terra Firma to retain an equity stake, of say 50%, while trading the other equity to Citigroup to get some of the debt wiped out. Or it could mean selling off some of its EMI assets to reduce debt. Time will tell.