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The Real Deal: Trials of winning the wrong auction

Bankers bored of the credit squeeze are now obsessing over Guy Hands and his £4bn investment in EMI.

Word is the chief executive of buy-out group Terra Firma is in a wild panic about his impulsive acquisition and how he’ll manage to make a return on the record company he bought on the back of 43 pages of basic due diligence.

The first problem is the amount of equity he’s injected. Mr Hands used 20 per cent of his old fund and 25 per cent of his new fund, totalling about £1.5bn. In other words, he bet a huge amount on just one deal - a big taboo in private equity as investors do not typically allow more than 15 to 20 per cent of a fund to be used on a single transaction.

Second, he has diverted about two-thirds of his team to work full-time on EMI - part of the reason why no one at the firm has time to work on a bid for Jaguar/Land Rover or any other interesting opportunity.

Third, Mr Hands’ aim of improving the investment by 2 to 3.9 times sounds remarkably familiar by taking out $233m (£113m) of fixed costs. But back in January, EMI had already identified cuts of £110m annually by 2009, or about 5 per cent out of its fixed-cost base, and squeezing out more without destroying the business looks tough.

Fourth, one model does not fit all in private equity. Mr Hands is best known for making money by issuing bonds against the cash flow of his investments. But securitising anything in this credit crunch, let alone future earnings of rock stars, is impossible. Remember how David Bowie fell to earth when his bonds were downgraded from A3 to Baa3 in 2004 after a slump in sales in the wider record market?

Fifth, artists working for EMI must hate Mr Hands after he told investors he will sack those not working hard enough. These are rock stars, not German state-owned properties.

Mr Hands wanted EMI because he underbid on both Thames Water and Alliance Boots and it was becoming embarrassing to keep losing to the big boys such as Macquarie and KKR. But nothing can be as bad as winning the wrong auction.

This entry was posted by Lina Saigol on Monday, November 26th, 2007 at 7:26 and is filed under Uncategorised. Tagged with , , . You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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Comments

  1. Nov 29   0:29 Posted by Salar Farzad [report]

    Presumably it wasn’t Bowie or David Pullman who created the asset class who “fell to earth” but Prudential who bought the bonds. In fact it showed remarkable financial astuteness on Bowie’s part in being well ahead of the curve in seeing the coming slide in CD sales.

    Would have been a nice line though if only the facts fitted.

  2. Nov 28   20:12 Posted by :: Remixtures [report]

    […] Com os bancos à perna devido ao investimento no valor de 3,6 mil milhões de euros na EMI realizado em Agosto passado, Hands virou-se agora para as organizações que representam os interesses da indústria discográfica em todo o mundo na sua luta sem tréguas contra a pirataria partilha ilegal de ficheiros. […]

  3. Nov 28   14:50 Posted by Right Move, Wrong Reason « Cheaper than therapy [report]

    […] Mr. Hands, it seems, has come to the realization that his firm’s purchase of EMI may not have been the smartest of moves. With a reported $3b equity stake in the $8b purchase, Guy has made a sizable bet and is now counting on mythic cost cuts and dream-like gains to bail himself out of a quickly sinking ship. […]

  4. Nov 26   19:53 Posted by Paul Sanders [report]

    The downgrading of Bowie Bonds was an early warning sign for the music industry that many felt able to ignore, but at least the performing (broadcast and live) revenue element was strong if the mechanical (record sales) was weak. And arguably it was one factor in getting Bowie back on stage, which in itself was a sign of the times as it was reliant on record companies for neither funding nor revenue.

    However the comment on securitisation is spot on. Until revenue from sound recordings is securitisable in the same way as that from songs there will be no reason for anyone to invest in either making sound recordings or administering and marketing catalogues of them. And that points the way towards reasonable and non-discriminatory wholesale licensing to new distribution partners such as ISPs instead of the Stalinist command economy approach that pertains today, along with its massive and disruptive costs of enforcement.

    Bronfman at WMG himself said that record labels went to war with consumers and consumers won. In fact consumers just carried on getting and enjoying music in ways that the record labels refused to countenance, as indifferent as they could be to this phoney and costly war. And last week we had John Kennedy at the IFPI crowing about a French victory in the ‘war’ on filesharing. No-one wants to finance a war - especially one without spoils.

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