Terra Firma plans EMI securitization

Reports of a counterbid for EMI from Corvus Capital have followed hot on the heels of Terra Firma’s £3.2bn (€4.7bn) bid for beleaguered music company EMI earlier this week.

However Corvus has now confirmed that although it had prepared a bid for the troubled music group EMI it has now ruled itself out

“Corvus Capital confirms that it had actively considered making an offer for EMI Group and had access to the necessary funding to do so. However, given the announcement that Terra Firma is to make a recommended offer for EMI, Corvus Capital now confirms that it has no intention to make an offer for EMI,” Corvus said in a statement to the market today (May 23rd).

Corvus Capital is a Geneva-based private equity firm run by businessman Andrew Regan. Shareholders also indicated today that they are happy to support the Terra Firma bid.

It is expected that Guy Hands private equity firm will finance at least part of its bid by securitising future expected revenues from the group’s music publishing division. Unlike the recorded music arm, which has struggled in recent years in the face of digital downloading, this has maintained steady profitability.

Hands, who founded Terra Firma in 2002, has a strong record in this area of finance. At Nomura Principal Finance, he pioneered a string of such securitisation instruments, in the first instance for pub companies.

There is also a precedent for securitization in the music publishing industry. In March 2001, the Royal Bank of Scotland (RBS) organised a £60m issue for Chrysalis Group secured against revenues from its music publishing arm. That put a value of £150m on the whole of that division.

EMI’s music copyright business claims to be the world’s largest. In the year to March it made £105.2m earnings before interest, tax, depreciation and amortisation (EBITDA) from revenues of £401m.

Chrysalis’s equivalent arm is a sixth of the size of EMI’s. It produced revenues of just £68m last year, and it is far less profitable, recording £5.6m in EBITDA. On that basis Terra Firma could raise as much as £900m from a securitisation.

That would nearly wipe out EMI’s existing debt, which stood at £1.15bn at the end of March. It would also reduce EMI’s borrowing costs, which in the last financial year totted up to £106.9m net, or 9.3% of outstanding debt.

In mid April, the group, which at that stage had rejected a 260p a share approach from Warner Brothers, had set out plans to pursue its own securitisation, appointing RBS and Deutsche Bank to explore this option. At the time this was seen as a means of defending the company against unwanted attention from private equity predators.

Citibank and Deutsche are arranging the debt and the securitization to facilitate the takeover for Terra Firma. Deutsche Bank is also one of the advisers to EMI on the recommended £3.2bn Terra Firma offer, alongside Greenhill and Citibank. While Dresdner Kleinwort is advising Terra Firma and its bid vehicle Maltby.

Chris Spink