Will Hands be a sympathetic witness, humble and vulnerable to the jury, or will he come across as a cocky, arrogant guy who knows everything?


Terra Firma-Citibank Trial Gets Underway Today in N.Y.C., with Future of EMI Music in the Balance

Nothing less than the future of one of the world’s four major music groups is at stake as Terra Firma’s Guy Hands goes up against his longtime Citibank colleague David Wormsley in a New York City courtroom today over his ill-fated 2007 acquisition of EMI Music.


The high-profile U.K. private equity titan, Hands fought to have this jury trial heard in New York, largely because of his tax exile status in his native England, having moved his official residence to Guernsey, and is only allowed a certain number of days back in Britain.

Hands started his career as a bond trader at Goldman Sachs in the early ’80, leaving for Nomura in 1994, where he made a fortune as managing director of its principal finance group. His first major deal was buying Angel Trains, where he made a £390m profit and became the U.K.'s biggest pub landlord.

He founded Terra Firma Capital Partners as a spinoff from Nomura in 2002 with a $2.7 billion private equity fund, acquiring a property portfolio in the U.K. and Germany, residential housing and motorway service stations. Terra Firma is also the largest owner of movie theatres in Europe, with the United Cinemas International and Odeon Cinema chains. Other acquisitions include the water company Waste Recycling Group.

It is Hands’ 2007 acquisition of EMI Music for $6.7 billion, which he wrote down by 90% (approximately €1.5 billion) in Nov. 2009, that is at issue in the current trial. By taking the bank to court, Hands is hoping to force them to restructure the  £3 billion it lent Terra Firma to finance the deal, as well as collect damages by convincing the jury that his old pal Wormsley, Citi's head of U.K. investment banking, tricked him into upping his bid by misleading him about the presence of other private equity bids, including one from Cerberus Capital Management?

David Boies, who will represent Terra Firma and Hands, is one of the most prominent attorneys in the country. The Yale Law School grad repped Al Gore in his post-electoral dispute with George Bush, Napster in RIAA's suit against it for copyright infringement as well as the Justice Department in its anti-trust action against Microsoft. More recently, he’s been Jamie McCourt’s lawyer in her divorce trial with husband Frank over ownership of the L.A. Dodgers.

Boies’ strategy will be closely scrutinized. Will he be able to convince the nine-person jury and presiding Judge Jed Rakoff that Citibank’s actions in the Terra Firma case  were symptomatic of its overall role as scapegoat for the world’s economic crisis? Will Hands be a sympathetic witness, humble and vulnerable to the jury, or will he come across as a cocky, arrogant guy who knows everything? Would a U.K. jury have been more sympathetic to his plight, considering EMI’s a homegrown British company? Will a New York jury respond, instead, to Citibank’s home field advantage?

Speculation now centers on the witnesses, who will testify to the value of EMI. Were there any competitive bidders for the company, or did Citibank up the bid by misleading Hands, who was forced to up his offer at the last minute? Will the notoriously press-shy Wormsley, who doesn’t even have a photo of himself on the Internet, testify against his old pal? Will either side blink? Is there any chance at an out-of-court settlement?

Terra Firma witnesses reportedly include Riaz Punja, who led the EMI acquisition, and Lenard Tessler, a managing director at Cerberus Capital.

Speculation is that Terra Firma may be willing to settle if Citi loosens the covenants on the EMI loan. That would free the buyout firm from having to make regular cash injections to avoid default. Even then, however, the business would still have too much debt: applying the same multiple as a listed rival, Warner Music Group, EMI is probably worth at least £1 billion less than the current face value of Citi’s loan.

But a settlement also has its drawbacks. For one, other disgruntled clients could be encouraged to try a similar approach. But even if Citi mounts a successful defense, Terra Firma investors may agree to prop up EMI until 2015, when the loan matures. The longer EMI struggles, the longer the impasse—and Hands’ embarrassment—continues.

On the other hand, relying on a jury trial could be a huge risk for Citibank. E-mails disclosed in preliminary court filings already reveal the bankers celebrating the fees earned from the deal. Further public evidence could be damaging to Citibank, which might be forced to also pay hefty damages, even as it denies Hands’ charges, insisting that the Terra Firma board had already authorized the bid for EMI before Wormsley told his buddy that Cereberus was allegedly still in the running.

Hands is betting that Citi doesn’t want details of its boom-time deals to be exposed to public glare less than two years after it was bailed out by American taxpayers.

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