A triumph for Terra Firma would bring in significant cash compensation to prop up EMI, while a victory for Citigroup would make it vastly more likely the company will fall under the bank's control.
Old Pals Guy Hands and David Wormsley Set to Go Head-to-Head in N.Y. Court
According to the Independent U.K., Terra Firma boss Guy Hands’ code name for his acquisition of EMI Music was Project Dice.

That £3.2bn roll will land him in a New York City courtroom next Monday (10/18) facing off with his old pal, Citibank’s David Wormsley, in an attempt to get EMI out of approximately £2.6bn of debt from the U.S. financial giant.

The upcoming “Terra Firma vs. Citigroup” case is turning into a personal feud between private equity millionaire Hands and the banker he befriended and trusted for more than a decade, with whom he worked on deals worth more than £35bn, shared nights at the opera and clay-pigeon shooting trips, whose wife’s 40th birthday he hosted at his Italian vineyard—and who Hands now claims betrayed him on Project Dice.

Hands won the battle to hold the case in New York rather than the U.K., since he is a tax exile, who makes his home on the Channel Island haven of Guernsey. Restricted in the time he spends in England, Hands stays instead at a newly built mansion near the capital of St. Peter Port, the most expensive house ever purchased on the island.

Guy Hands’ Project Dice went wrong almost from the start. EMI slumped to a £1.6bn loss in its worst year, the 12 months to March 2009, and was still in the red a year later. Some 2,000 job cuts hadn't relieved the pressure of all that debt. Terra Firma has had to give EMI repeated cash infusions to stop it from defaulting on its obligations to the bank, something that would mean control of the company would fall to Citigroup.

Terra Firma filed its lawsuit against Citigroup last winter just a few weeks after Citigroup spurned a deal to renegotiate EMI's debts. The bank had hoped to package that debt and parcel it out to other investors. But the first rumbles of the credit crisis had begun, and Citigroup has been stuck with it ever since.

Last November, Hands had offered to put in another £1bn from himself and Terra Firma's co-investors, but only if Citigroup wrote off about £1bn of its loans. It said no. That’s when Hands decided to go for his old pal Wormsley.

The 50-year-old Wormsley, nicknamed "The Worm,” is Citigroup's UK banking chairman and one of the most respected deal-makers in British finance. His reputation as an honest broker has been his calling card.

"Terra Firma v Citigroup" hinges on three alleged phone calls between the two men the weekend before Hands made his final EMI bid, including one call that the private equity millionaire took at Guernsey airport near midnight. Hands claims Wormsley told him another firm, New York-based Cerberus Capital Management, was still in the running, and that he must therefore bid 265p per EMI share to be sure of winning the next day’s auction the next day. Unbeknownst to Hands, Cerberus had, in fact, pulled out hours before, so he upped his offer

Citigroup earned £6m in fees for advice it provided to EMI, and £80m from Terra Firma, for underwriting loans for the deal. In an internal email, one Citigroup executive said: "We got paid on both sides." Terra Firma claims that EMI's debt load would have been much lighter if it had not been misled into overpaying for the record company, and wants compensation. Citigroup points out that Hands hardly had a gun to his head when he decided to sign the check, says the suit has no merit, and promises to fight it vigorously.

Wormsley disputes the content of those conversations and continues to insist he didn't know whether Cerberus was still in the auction or not. The two sides will use flight logs from Hands' private jet and telephone records to try to reconstruct who said what to whom.

Attacking Wormsley's honesty hits at the very core of the banker’s reputation, while accusing Citigroup of being riddled with conflicts of interest damages the financial institution irrevocably.

And this is, of course, the point.

The stakes are high. A triumph for Terra Firma would bring in significant cash compensation to prop up EMI, while a victory for Citigroup would make it vastly more likely the company will fall under the bank's control. Much of whatever value a restored and refinanced EMI creates in the future will fall to the winner of this courtroom fight.

There is still a week in which to forge a behind-the-scenes settlement. Citigroup is arguing that, not only didn’t Terra Firma feel aggrieved, Hands was still working together with Wormsley on an acquisition of Gatwick Airport in early 2009.

In fact, Wormsley was still invited to Hands’ annual clay pigeon shoot, though a Terra Firma report insists they didn’t speak.

When the two face off in a N.Y. court next week, there will be more than pigeons biting the dust—the future of EMI Music, and Citigroup for that matter, will be at stake.

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