Wednesday, February 2, 2011

Hands off EMI, Citi's in

by Emmanuel Legrand

So it's goodbye from Hands, and it's hello from Citi. And EMI once again changes hands.

No doubt that few will regret Guy Hands at EMI. His tenure at the major company started well, with great declarations of intent, but it then went from one PR disaster to another blunder and culminated with his legal case against Citi last year, which he lost. In the process, his track record, as well as his reputation as a businessman ended up in shambles.

Hands certainly overpaid for EMI in 2007 (especially if you compare to the price Edgar Bronfman paid for Warner Music Group). It was a vanity purchase, as the trial has shown.

But from the outset it did put the company under intense financial pressure to meet its covenants. In an eco-system that was shaken to the core by the digital revolution, the last EMI needed was this kind of pressure. It needed a clear direction and investors who were in there for the long run. Instead, it had no strategy, other than try to re-write the way record companies worked (which was a fine goal and a necessary undertaking, but they forgot that there were artists too...), and EMI was required to provide cash to pay its lenders (or Terra Firma's, to be more specific).

EMI needed to change but only a few measures taken by Hands made sense. Among them, letting its publishing division grow without interfering, and then appointing last year Roger Faxon as CEO of the group. But a lot of damage had been done, not least within the creative community. On the operational side, some of the new managers brought in by Hands were so busy proving that they were different from the old regime that they somewhat lost track of what mattered, which was to find, develop and market artists.

Instead, they created an internal structure (known as the matrix) that was straight out from some management consultancy textbook and designed by some lunatic Inspector Clouseau. One of Faxon's first symbolic measures when he took over was to dismantle the matrix.

So where does EMI go from now? At Midem last week, before the Citi deal was known, few were ready to bet a penny on the company's survival in its current state. When asked which part of EMI he would he be interested in, Vivendi CEO Jean-Bernard Levy joked by saying he would not want to pick EMI's debt. At least, thanks to the deal with Citi, a large chunk of the debt has been wiped out. That should give EMI some breathing space.

Then it will all come down to what Citi will want to do with the company. Banks are usually not in the business of owning and operating record companies. There are two possibilities for Citi: put the company up for sale immediately, and quickly pocket whatever they can milk from the market and wash their hands (sorry...) of EMI's future; or wait for a few years to give EMI some time to regain strength and then sell at a premium.

Newspapers are filled with reports that Warner and BMG Rights Management are interested in part or all of EMI's assets. One scenario would see Warner selling its music publishing arm Warner/Chappell to BMG Rights Management or Sony/ATV and acquire EMI with the cash it had generated from the sale. It would then merge its recorded music operations and have a significantly stronger record company and own a larger publishing company. This would significantly reshape the music biz map and create a true competitor to Universal and Sony Music.

One thing is certain, Hands has failed. That in the process he took down one of the world's largest music company is nothing to rejoice about (some around him may say that he saved EMI from bankruptcy, but it seems hard to make the case). He should now go back to where he came from, manage whatever millions he has left, and the people at EMI and the artists should get on with their jobs -- until they know what Citi will do with them next.

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