One of the world's largest music companies
EMI consisted of two divisions, EMI Recorded Music (the business which signs and develops recording artists, marketing and promoting them as well as distributing their recorded music) and EMI Music Publishing (the business which focuses on acquiring and marketing the rights to musical compositions).
Asset-Backed: EMI Recorded Music owned a catalogue of over three million recordings, and EMI Music Publishing owned over a million contemporary and classic music compositions.
Requiring Fundamental Change: Terra Firma recognised the potential to develop the music publishing catalogue while streamlining the Recorded Music division, repositioning EMI as a digital rights management group.
- Recorded Music’s plethora of local record labels were radically restructured into three global business units focused on New Music, Catalogue and Music Services. This led to streamlined activities, a focus on developing artist brands and a deeper consumer understanding – an approach since adopted by the other major labels.
- Non-profitable legacy activities were substantially reduced and rigorous cost discipline was introduced, saving substantial amounts per annum.
- Profitable activities received greater investment, leading to the success of new artists. Revenues stayed broadly flat during Terra Firma’s ownership against a rapid market decline while EBITDA and the EBITDA margin significantly improved year-on-year between 2007 and 2010.
- The majority of the senior management was replaced post-acquisition and Terra Firma ultimately appointed Roger Faxon, formerly the Chairman and CEO of Music Publishing, as Group Chief Executive.
Developing through capital expenditure
- The ability to deploy Terra Firma’s intended capital expenditure programme was prevented by two factors. Citigroup, the sole lender, was not able to syndicate the Recorded Music debt package and Terra Firma was not able to sell down its equity investment to co-investors as originally intended. This meant no additional equity was available for capital expenditure and debt covenant restrictions limited the use of internally-generated cash.
Building through mergers and acquisitions
- Central to Terra Firma’s investment thesis was the execution of consolidating acquisitions for the Recorded Music business and selective bolt-on acquisitions for the Music Publishing business. However, no additional equity was available in order to execute this strategy.
Lowering the cost of capital to create extra upside
- A planned securitisation of EMI’s publishing assets was prevented by the change in the global financial landscape that occurred after Terra Firma's successful bid for EMI.
- Due to changing market conditions between May and September 2007, the transaction financing of short-term, bridge-type conditions and covenants could not be replaced. This interim capital structure remained in place for the duration of Terra Firma’s ownership, despite ongoing efforts to reach a restructuring agreement with the lender.
Status of Investment: EMI was put into Administration in February 2011 and sold to Citigroup in a pre-packaged process without Terra Firma’s involvement. Citigroup became the new owners of EMI despite the fact that EMI was up-to-date on all interest payments and had complied with its financial covenants throughout Terra Firma’s ownership.