Thursday, February 04, 2010


You hear a lot about how terrible it is being a record label these days - but they're still quite nice little businesses. In fact, if they started to spend less time trying to force the world not to change, they could have a happy life making hundreds of thousands of pounds every year.

Take EMI, for example. £300,000,000 earnings before tax and write-downs last year. Sure, it's not an oil company, but it's a nice business. Not even managed decline, is it? Manage the reinvention of the business, and you'd be fine.

That is, unless you did something stupid like loading the company down with millions of debt it barely has a hope of repaying. That sort of stupid.

What's that, Robert Peston?

EMI's results for 2009 will show that it generated earnings before interest, tax, depreciation and amortisation of around £300m.

Multiplying that £300m by six or seven - the standard valuation multiple these days - gives a notional value for the whole of the recorded music business of something like £1.8bn.

That's good, right?
Now EMI was bought by Guy Hands' Terra Firma private-equity firm for more than $8bn in the autumn of 2007 (note that I have now switched into US dollars)

That takeover was financed with of $3bn of equity, provided by Terra Firma and its backers, and with $5bn of debt, provided by the giant US bank, Citigroup.

And just a few months ago, Terra Firma put in a further $500m of equity.

So if the business is now worth £1.8bn, that is equivalent to $2.8bn at today's exchange rate.

In other words, then...
Which means that every single cent of Terra Firma's equity has been wiped out. It also means that Citigroup is facing a loss of more than $2bn on the loans it provided.

The total loss for Terra Firm and Citi together would be something like $5.7bn.

Of course, Terra Firma has a plan. You don't look at a company struggling under piles of piles of debt without coming up with a cunning plan.
However, to use the jargon, those covenant breaches [when EMI breaks its banking promises] can be "cured" if Guy Hands can persuade Terra Firma's backers to stump up £120m in the next month or so.

Ah yes. Put more money in to the company. That makes sense. Let's just hope nobody stops to notice that it would take EMI two years to actually earn back that £120 million.

Hands grand plan seems to be asking backers to fund an even higher wall for spunking cash up against. Who wouldn't fall for that, eh?

[Thanks to @alanconnor]