Vikram Pandit can’t rock’n'roll like Guy Hands

February 1, 2011

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Vikram Pandit has been banging his head for years over Citigroup’s financial problems. But that doesn’t qualify him as an expert on heavy metal. So expect the bank to quickly offload EMI, the Iron Maiden-to-Katy Perry music publishing and recording business it seized on Tuesday.

The takeover marks the finale of a four-year cycle of recrimination between the bank and private equity boss Guy Hands. Hands’ London-based Terra Firma overpaid for the business in May 2007, larded on too much debt and then, partly because of cuts needed to meet interest payments, soured relations with EMI’s primary asset — its artists. But Hands also tripled the company’s profit. Some financial wiggle room and a charm offensive might be all a refreshed EMI needs to thrive.

That’s assuming the past can be forgotten. Terra Firma lost its entire 1.75 billion pound investment, while Citi’s 3.4 billion pound loan to EMI, which has now made it the proud owner of the business, has been written down to 1.2 billion pounds.

That new low base is the key. Since Terra Firma bought EMI in 2007, Warner Music Group — EMI’s closest music industry rival — has seen its stock market value plunge by around 68 percent. Assuming a similarly earthward trajectory, EMI could now be worth 1.2 billion pounds — coincidentally, the carrying value for the business on Citi’s balance sheet.

Because the bank has already taken that writedown, the bizarre rules of Wall Street accounting mean anything over and above that price fetched in a sale to, say, Warner Music or KKR, would turn into a gain for Citi. And either of them — or even, ironically, Hands himself — would be a far more suitable owner for EMI than a bank.

Moreover, with 300 million pounds of cash in the bank and a two-thirds reduction in interest payments, EMI is suddenly in pretty good shape. Hands may have turned off a few divas, but under Terra Firma’s stewardship EBITDA rose from 90 million pounds at the end of 2007 to 241 million pounds two years later.

So if Citi can find a buyer willing to pay 10 times those profits it will effectively double its written-down paper investment in EMI. Though considerable damage has been done, that would help turn a four-year dirge into a happier song.

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