In Topic 8 (page 131) I have significantly updated the whole area of private equity deals. In the first edition I had earlier written about the buyout of Boots which took place during the spring of 2007 just before the credit crisis had started to inhibit such deals. In the introduction to the latest edition I set out the ideal conditions for such deals to prosper. In short you need rising stock markets and loads of cheap debt finance readily available. As the credit crisis took hold the private equity market virtually ceased to exist and company valuations collapsed and interest rates soared. In recent days the financial press has been full of stories about the financier Guy Hands and his many problems at EMI which is home to artists like Coldplay, the Beatles and Katy Perry.
To put it simply he now argues that Citigroup tricked him into paying a hugely inflated £4.2bn for EMI in a highly leveraged deal with the bank itself lending him some £2.6bn of bebt as part of the funding. He now faces a huge loss on the deal and in addition he is struggling to refinance these onerous loans. Hand's company (Terra Firma) has to find over £100m in emergency funding ("equity cure") simply to avoid breaching Citigroup's lending covenants. In a worse case scenario breaking these could lead to Citigroup taking control of EMI's assets. There is a bitter legal battle going on between Hands and the US banking group. It is a situation that is unlikely to end in much good news for anyone involved apart from the corporate lawyers involved.
Feb 6, 2010
EMI and problems of private equity deals...
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The introduction to topic 8 clearly states two factors that are necessary for these types of private equity deals to be successful. The first is; the availability of cheep credit, which was achievable in 2007. The second was; rising stock markets and immense confidence that this will continue. This second factor is where Hands seems to have miscalculated and which has eventually led to 90 per cent of the equity being erased.
The proposed cash injection might save EMI from the bank’s hands temporarily but it seems almost inevitable that Citigroup will finally take control. Whether this occurs after a long and painful process where EMI continues to suffer remains to be seen, and with the original cost of £4.2bn also in question the situation is about to get messier.
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