Citigroup (NYSE:C) Sued By ‘Guy Hands’ and Terra Firma Over Acquisition of EMI

Citigroup (NYSE:C) is being sued by the CEO of private equity firm Terra Firma in the deal where the bought EMI for what he is calling a ‘fraudulently inflated’ £4.2 billion.

Numbers reported by the music giant last week showed they have lost £1.7 billion since March 2009, and are in danger of failing if more money isn’t pumped into the company by investors, something Terra Firma Chairman Lord Birt commented on, saying, “There is no certainty that such funds will be available.”

As with other major music labels, EMI has been experiencing a decline in revenue for the last five years, making one wonder what it was that Hands saw in the first place which made him think he could turn the company around, as no music label company has been able to generate the type of revenue they have in the past.
 
According to Hands, it was Citigroup’s fault, as they were advising EMI on the deal at the time, and was pressured into participating in an auction run by the bank without being given time to perform due diligence. Consequently, Hands claims he had to take out a £2.7 billion loan with Citigroup to acquire the company. The loan part is being disputed because of assertions by Hands he wasn’t given time to search for other loans under better terms.

But from that perspective it doesn’t make much sense, as the interest rates are only 2.75 percent above Libor, so the cost of the loan is less than when Terra Firma took over EMI. The problem for Hands is every third month covenants are measured to make sure what is owed is covered by collateral. At this time the liabilities of EMI are larger than its assets.

This almost sounds silly to say on Hands part, as it makes him look like an amateur, when he was running a high-profile private equity company.

Later on, Hands communicated a little better saying this, “Terra Firma has now discovered that in order to induce it to bid in a private-equity auction for EMI, Citigroup misrepresented fundamental facts about that auction, including misrepresenting that there was another bidder. Because of Citigroup’s misrepresentations, Terra Firma paid a fraudulently inflated price.”

Citigroup claims the allegations are false and are ready to defend itself if it comes down to it. It seems the bad blood between Hands and Citigroup isn’t helping Terra Firma, as in similar situations in the past Citigroup has worked with debtors to renegotiate the financing. So far there have been no overtures from the giant bank to take that step.

To keep the company righted, Terra Firma has had to spend over £100 million since they acquired EMI, and estimates from its directors are they will need £120 million in order to pass the next assessment which is due in March.

Assuming the case goes forward, there is a court date set for October in Guernsey, but Citigroup has asked for the venue to be changed to London, which Hands is against based on tax-related issues.

This lawsuit is obviously a desperate attempt by Hands and Terra Firma to keep control of EMI, which Citigroup would own if the private equity company defaults or doesn’t pass their assessments.