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Terra Firma bankers face the music over EMI acquisition

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26th Jul 2007
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The move to turn EMI into a private record label has been slowed by problems placing the necessary debt, in a further sign of greater market caution over leveraged buys.

After KKR’s battle to place the debt required to finance its purchase of Alliance-Boots, private equity’s power to survive a rising cost of capital is being further tested in the Terra Firma bid for record company EMI. With four days to go, Guy Hands’ private equity vehicle has secured support from less than one-third of the shareholder acceptances it needs for the £2.4bn offer. Adviser Citibank’s requirement for a 90% acceptance by 29 July has been taken as a signal of its concerns about the offer price: Terra Firma must borrow up to £3.5bn for a deal that includes EMI’s debt, which has climbed towards £1bn after a £260m loss last year.

The worsening terms on which it is likely to obtain this is casting doubt on the profitability of the deal, despite Hands’ legendary expertise at profitable turnarounds. EMI is suffering a familiar problem – shortage of hits by its top rock musicians – but these are underlain by ongoing problems getting fans to pay full price for their tracks in the age of the download. If successful, Terra Firma will check the trend towards global concentration of book and music publishers: EMI management recommended its offer after turning down last year’s approach from US rival Warner Music. But a trade sale could come back onto agenda if the tightening credit market ties Guy’s hands.

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