The boss of Terra Firma, the private equity firm that had a disastrous tenure owning EMI from 2007 to 2011, reckons that his purchase of the music major, and his team’s strategy for turning round its fortunes, would have worked had it not all occurred just as the credit crunch was, well, crunching.
And to an extent, Guy Hands is right. The plan, of course, was to share the multi-billion pound debt that had been used to buy the EMI record company and music publishing business, and to refinance here and refinance there, sharing the risk and, perhaps more importantly given the public interest in a company as old and iconic as EMI, making it much harder for outsiders to work out the state of play in the tricky times.
But by autumn 2007 there was no one left willing to share the risk, leaving EMI with a very public multi-billion pound debt to a flagging US bank that was in the process of falling out with Hands big time. That bank, of course, repossessed in 2011, and has since split the EMI company into two, merging the two sides of the business with the firm’s two biggest competitors, and thus basically killing off Britain’s last major music company, which had been celebrating its 80th birthday as the bankers took over.
But it could have all been so different. In a polemic on banking regulations for the Financial Times, Hands writes: “At Terra Firma we believed EMI presented a great investment opportunity, which is why we committed to it in May 2007 and underwrote such a high exposure to a single deal across two of our funds. We were confident that we would be able to sell down part of our investment to co-investors. No one knew that credit conditions would change so quickly and disastrously. We were not the only firm caught out by the crash but, because it was large and colourful, EMI became the poster child for failed deals”.
He continues: “The irony is that EMI could have been a good deal if the debt and equity market conditions had not changed so dramatically. Our problems stemmed from the timing of the transaction not the strategy. Our view of the music industry’s overall market decline proved to be largely correct.
As EMI’s subsequent performance has shown, our plans for transforming its operations were effective. Under our ownership, EMI moved from having an annualised negative cash flow of £150m a year to a positive cash flow of £250m a year, while at the same time EMI’s market share increased 13% in an industry that declined by 15%”.
We’ve noted before that the EMI repossessed off Terra Firma in 2011 was much healthier than the one the equity twonks bought in 2007, though whether that was as a result of clever strategy from Team Firma, coupled with the sort of brutal but necessary streamlining only ruthless City types could achieve, is debatable. Certainly you never sensed that any calculated strategic thinking was pouring in from the owners at the top of the organisation while Terra Firma was in control, especially once the shit hit the fan. It could be argued that, instead, certain executives inside EMI managed to rise to a huge challenge once put under the intense pressure of a collapsing business.
But either way, Hands is right to say that, more than anything, the credit crunch helped shape the final gloomy chapter of the EMI story. And whatever you think of his time as EMI owner, Hand’s opinions on the banking sector, and the sort of rules private equity firms like his should self-enforce to prevent another EMI (Terra Firma, after all, was a big loser from that debacle), make for interesting reading.