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Citi has a vested interest in EMI’s fate—indeed, the bank has 4.3 billion reasons to do whatever is necessary to keep the music company alive.

GUY’S HAIL MARY

Hands Finds Himself in the Glare of the Media Spotlight on the Eve of the Big Trial in New York
If Guy Hands relishes the spotlight, he must be having the time of his life right now. The private equity star’s character and motives are being scrutinized by America’s most respected newspapers this week, as the N.Y. Times runs a prospectus on the Terra Firma-Citigroup court case, which goes to trial on Monday, right on the heels of the Wall Street Journal’s overview.

In the latest piece, reporter Peter Lattman succinctly expresses the defendant’s attitude and expected strategy. At the trial, writes Lattman, Citigroup’s lawyers are expected to depict his lawsuit as a Hail Mary pass to try to salvage a failed investment and portray Hands as having a classic case of buyers’ remorse.

Representatives for Citigroup, which still owns all of EMI’s loans, say that it has done nothing wrong, and that the case is a negotiating tactic by Hands. The lender has for more than a year been locked in restructuring talks with Hands over the fate of EMI. Citi has played hardball with Hands, rejecting his proposals to restructure the company’s overleveraged balance sheet.

“Bringing a lawsuit is a common strategy to employ in order to gain leverage in a negotiation,” said Harvard professor Guhan Subramanian, whose recent book Negotiauctions examines complex deal-making situations. “Even though Citigroup believes this is a frivolous lawsuit, it’s risky to expose itself to the uncertainties surrounding the wild card of a jury trial.”

Citi has a vested interest in EMI’s fate, the Times story points out— indeed, the bank has 4.3 billion reasons to do whatever is necessary to keep the music company alive. The bank couldn’t sell EMI’s loans to other investors when the credit markets collapsed, forcing it to retain $4.3 billion of the company’s debt on its books.

That disastrous chain of events, Lattman notes, has made EMI Exhibit A for the handful of overpriced boom-era acquisitions that have since turned sour.

EMI is still at risk of defaulting on its debt. If it does, Citi could wrest control of EMI and sell it off once again. Despite its woes, EMI would be highly coveted. There would likely be a number of eager bidders for the perennially profitable EMI Music Publishing, including the acquisitive and deep-pocketed BMG-KKR consortium, while Edgar Bronfman Jr. has lusted after the record company for much o the previous decade.

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