EMI Group Ltd, seized by Citigroup Inc after breaching loan covenants, may fetch about $2 billion in a sale, according to Needham & Co, narrowly covering its $1.94 billion debt.
The music company, taken private for $6 billion by Guy Hands’s Terra Firma Capital Partners in 2007, may sell for 12 to 14 times earnings before interest, taxes and depreciation and amortisation, referred to as Ebitda, Laura Martin, an analyst at Needham in Pasadena, California, said today in an interview.
Citigroup’s takeover of London-based EMI will spark a reorganisation of the music industry that may involve Warner Music Group Corp, Martin said. Private equity firms KKR & Co and Apollo Group Inc, as well as Sony/ATV Music Publishing, are likely to seek EMI’s publishing unit, she said. Martin said Warner Music, itself seeking a buyer, is favoured to win EMI’s recorded music, which lost Paul McCartney and other acts.
“We see this as healthy for the global music industry,” Martin said. “Revenue continues to shrink and the music industry must restructure and reorganise to survive.”
Before Citigroup took control, Warner Music, the third-largest record company, and KKR-controlled BMG Rights, had already expressed interest in EMI. Citigroup, based in New York, seized the record label of the Beatles and Pink Floyd yesterday, writing down the music company’s debt by 65 per cent to £1.2 billion ($1.94 billion).
Warner Music hired Goldman Sachs Group Inc to recruit bidders for all or part of the company while it separately seeks to buy EMI, people familiar with the plans said last month. New York-based Warner Music, with about $500 million in cash, would fetch about $2 billion, Martin said.
Money on sidelines “A lot of money is coming off the sidelines,” Martin said. “We expect a lot of interest from private equity and a few strategic players.”
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EMI is the fourth-largest record company, according to Nielsen SoundScan data. Universal Music, owned by Vivendi SA, is number one. Sony Music, a 50 per cent partner in Sony/ATV with Michael Jackson’s estate, is number two.
BMG Rights is the most likely buyer of EMI, said Claire Enders, chief executive officer of Enders Analysis Ltd, an entertainment industry research firm based in London. Warner, which abandoned a takeover for EMI in 2007, held talks in 2009 to make a joint offer with New York-based KKR.
Terra Firma said in a statement it was “pleased” that EMI’s debt had been reduced. Danielle Romero-Apsilos, a Citigroup spokeswoman in New York, and Amanda Collins, a spokeswoman for Warner Music, declined to comment. Calls left with BMG outside of business hours weren’t returned.
Buyer’s remorse The deal “has given us one of the most robust balance sheets in the industry with a modest level of debt and substantial liquidity,” EMI Chief Executive Officer Roger Faxon said in the statement.
Hands said in a November speech he and his firm “would have looked like geniuses” had they not invested in EMI. Terra Firma, Hands’s LBO firm, bought EMI at the height of the buyout boom. Citigroup provided about £2.5 billion of loans to finance the purchase.
The purchase closed in August 2007, months before the credit crisis struck. Citigroup never found investors willing to take debt it provided for EMI.
Hands, 51, struggled to return EMI to profit as teenagers turned to file-sharing web sites that let them download songs for free, destroying profits in the record industry. Acts including McCartney and the Rolling Stones left the label. The company slipped from a profit of £86 million in financial year 2006 to a loss of £1.57 billion in 2009.
By February of last year, Terra Firma had written down the value of its £2.6-billion EMI investment to zero, according to a letter sent to its investors.