After months of speculation about whether EMI could stay afloat on it’s own, would be sold off, or would be seized by Citigroup (Citi), we now have a definite answer.
Citi, which provided £2.6 billion of debt for the 2007 buyout by Guy Hands’ Terra Firma, wrote off most of EMI’s loans after the investment vehicle set up by Terra Firma defaulted. In a debt-for-equity swap, Citi wrote off 65% of EMI’s debt in exchange for full ownership of the company. Citi completed a recapitalization EMI – reducing debt by 63% from £3.4 billion to £1.2 billion, and providing more than £300 million of cash now available to EMI. The new capital structure provides EMI with a strong balance sheet and the ability to invest in and grow its business. Before the restructure EMI was operationally profitable and able to pay the interest on its loan, but struggled to make a dent in the principle. Citi reported that although it retains ownership of the company, it would not interfere with EMI’s operations, which generated $2.64 billion in revenue in its last fiscal year, and posted a $534.9 million profit before interest, taxes, depreciation and amortization.
So what does it mean for EMI? Currently Roger Faxon, EMI’s chief executive, has a bright outlook recently saying, “The recapitalization of EMI by Citi is an extremely positive step for the company. It has given us one of the most robust balance sheets in the industry with a modest level of debt and substantial liquidity.” EMI further released a statement that said it would “continue delivering on its strategy to maximize value for the artists and songwriters it is dedicated to servicing.” EMI might be continuing operations as usual for the foreseeable future but for how long? The latest acquisition by Citi tees up EMI to be sold again as the US. Bank will more than likely not want to hold the music company for the long term.
The question now is what does the future hold for EMI? It most certainly will be sold off again but it remains to be seen to whom. At this moment all signs point to Warner Music Group. Yet EMI’s remaining debt is large enough that it would still complicate a potential merger with Warner Music Group (WMG), who 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. Not to mention that Warner Music Group is publicly owned and would have to answer to stockholders. It is possible that WMG could sell its Warner/Chappell publishing catalog and put the proceeds toward a purchase of EMI, either as a whole or for one of it’s arms. A deal involving two of the world’s four largest record companies could face regulatory hurdles, much like those that Universal Music Publishing faced when they acquired BMG publishing. WMG does have it’s mind on some sort of restructure, the company has employed investment bank Goldman Sachs to explore the option of either a sale of Warner or a purchase of EMI.
But if WMG doesn't buy EMI as a whole, it is unlikely that any other media company or private equity firm would do so, inevitably splitting up the fourth largest record company in the world.
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