LONDON — Guy Hands, the British dealmaker who made his name securitizing pubs and passenger trains, has assembled investors on a June day in London for the annual review of the companies held by his buyout firm, Terra Firma Capital Partners Ltd.
High on the list: EMI Group Ltd., the record company he bought in August 2007 with 1.47 billion pounds ($2.93 billion) cash, more than he has invested in any previous takeover, and 2.5 billion pounds of loans.
EMI — a 111-year-old company whose acts have ranged from the Rolling Stones to Radiohead and from Iron Maiden to Coldplay — has been struggling with declining sales since 2001. EMI's net loss in the 12 months ended in March 2007 totaled 288.5 million pounds. The Rolling Stones and Radiohead have left EMI.
While Hands has spent the past year firing employees, looking to weed out unprofitable performers and bringing in digitally aware executives, he has stepped into a company that has defied other attempts to lift it out of its misery.
A 'defining' deal for him"EMI will be defining for Guy," Robert Womsley, a partner in London at Citigroup Inc.'s alternative investments unit, said in an interview. "If he gets it right, it's another deal where he saw the opportunity others didn't," said Womsley, whose firm has money in more than 300 private equity funds, including Terra Firma. "If he gets it wrong, everyone will say, 'I told you so."'
The company, which owns the copyright to more than 1 million titles, receives royalties anytime songs such as "Singin' in the Rain" and "Strangers in the Night" are played anywhere. Its catalog of recorded music — more than 3 million tracks, including the Beach Boys' "God Only Knows" and Pink Floyd's "Another Brick in the Wall" — continues to generate sales.
"It's one of the toughest restructurings you can do," Hands said in an interview. The challenge is to overhaul the unit responsible for finding and hiring new talent and releasing their albums, because too many EMI artists never earn back their advances, he said.
An encouraging noteThe first signs are encouraging, Hands said in a July 14 e-mail to EMI staff. The recorded music unit swung into a profit in the three months ended on June 30 as it cut jobs and stemmed excess deliveries of CDs to retailers.
If Hands can turn around EMI, he'll be able to double his cash investment over the next four to six years, he said.
"It is a business under enormous challenge worldwide, not just for EMI but for the whole music industry," he said. The new-music unit employed 4,800 of EMI's 5,400 employees when Hands took over, he said. About 2,000 of those jobs are being cut.
Adding to the pressure, there will be no quick exit from the EMI investment for Terra Firma because the credit crunch makes buyers of private equity assets scarce. Hands said he won't sell EMI or any of Terra Firma's other assets until 2012 at the earliest.
The biggest hurdle for Hands is trying to make money out of selling recorded music. So-called file-sharing Web sites allow users to download songs without paying for them.
Worldwide sales of CDs and DVDs have dropped by more than a third in the past decade to $15.9 billion in 2007, according to the International Federation of Phonographic Industries, the music industry's trade association.
Ex-Google exec on boardAt EMI, operating profit from recorded music sales fell by two-thirds to 45 million pounds in the year ended in March 2007. All of that profit came from EMI's back catalog of recorded music, Hands said.
In April, Hands hired Douglas Merrill from Google Inc. to head EMI's digital music unit. Merrill, 38, who was the Mountain View, Calif.-based company's chief information officer, said so far he hasn't identified any single way to make customers pay to download music.
"When you don't know the answer, you try a bunch of things, and in careful ways you measure the result," he said. "We'll figure out how to make money later."
EMI has also negotiated contracts with legal music-sharing Web sites, which pay record companies royalties while allowing fans to download tracks for free.
Hands has had one big flop. In 2003, he wrote off a 318 million euro investment in Le Meridien hotels as business travel slumped following the Sept. 11, 2001, terrorist attacks in New York and Washington.
Overall, he has made big profits for investors since 2002, when he left Nomura Holdings Inc., where he had overseen the Japanese bank's Principal Finance Group, to start his own firm. Hands raised 5.4 billion euros for his latest fund, and invested almost 30 percent of it in EMI. Merrill Lynch & Co., which advised Terra Firma on raising funds, gave Hands a mock- up of The Beatles' Sgt. Pepper's Lonely Hearts Club Band album sleeve to commemorate the closing of the fund in May 2007. The mock-up superimposes Hands' head on the figure of George Harrison and substitutes the name Terra Firma for Beatles in the floral display.
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