In 2007, British private equity firm Terra Firma Capital Partners – controlled by one Guy Hands – bought legendary British music company EMI Group for £4 billion ($6.3 billion). Citigroup played a dual role in the deal, acting both as sell-side advisor and as provider of acquisition financing for Terra Firma.
The deal has been a disaster. EMI still owes £3 billion in debt to Citigroup. The company is groaning under the weight of that debt and the continuing carnage in the music industry, declining sales of music CD’s, widespread piracy and growing but less lucrative sales of digital music. Citigroup would have already foreclosed on the company if Terra Firma had not put over £100 million of additional cash into the company to make required debt payments.
So now Terra Firma is suing Citigroup, claiming that Citi defrauded Terra Firma when Citi’s banker told Guy Hands that Cerberus was also bidding for EMI and Terra Firma would have to top Cerberus’ bid to win the property. The trial started Monday in New York.
To which I reply, Guy Hands is a chump.
I don’t know the facts. Citi could have told Terra Firma anything under the sun as far as I am concerned. But it doesn’t matter. Guy Hands and the rest of Terra Firma’s management have a fiduciary duty to their investors. Even without reviewing the EMI purchase agreement, I am quite confident that there are no seller’s representations or warranties that Cerberus wanted to buy EMI. Cerberus may have bid, or they may not have; but it doesn’t change the fact that Terra Firma should have done its diligence and concluded that they wanted to buy EMI at the price they paid.
David, you breathlessly ask, does that mean you lie to buyers about what is going on in the sales that you are managing for your clients? No, it doesn’t mean that. I play hard for my clients but I play fair. I would not be stupid enough to answer a buyer’s question unless answering it serves my client. If a bidder asks me what it takes to win, I will answer as authorized by my client. If that same bidder asks me where competing bidder XYZ is coming in, I will likely tell that bidder to bid like they may not get another chance to acquire the property, because they might not.
And if a master of the universe like Guy Hands thinks that the company I am representing is worth more because a third party wants it, then I probably won’t go out of my way to disabuse him of that party’s interest. But I won’t lie to him.
Finally, when you read about this trial in the papers, keep in mind that Citigroup provided over $4 billion in debt financing for the transaction. Yes, they made two fees on the 2007 transaction – both the sell-side advisory fee and the financing fee. But the profitability of the transaction is at risk because Citi did not successfully syndicate that debt and so stands to lose serious money if EMI can’t pay them back. That doesn’t sound like the behavior of a bank that thought they were selling Guy Hands a pig in a poke, does it?
I know business is hardball, and Guy Hands is probably suing Citi to pressure them for concessions on the debt financing. Maybe it will work. But it’s bullshit. Man up, Guy, admit (at least to yourself) that you overpaid for EMI, and don’t go looking for someone to blame for your potentially career-wrecking mistake.