News Analysis: Lifting the veil

Guy Hands’ epic lawsuit against Citi for allegedly tricking him into overpaying for EMI shines a very public light on the normally secretive inner workings of the private equity business.

Attendees at the trial to determine if Citi owes Terra Firma Capital Partners up to £7 billion (€8 billion; $11 billion) for tricking it into overpaying for music publisher EMI have been given a full view of the inner workings of the private equity firm’s deal-making.

The smallest details of Terra Firma’s internal correspondences in 2007 about the EMI acquisition have been splashed across a huge projector screen in Room 14B of the US District Court in New York.

Emails in which Hands exhorts his deal team to fight to meet a tight bid deadline; emails of Hands excoriating his colleagues for not including certain numbers in its final analysis of the floundering music publisher.

The trial has revealed that Hands has between 60 and 70 percent of his own wealth tied up in EMI – almost £100 million, including his carry from Fund II (£70 million), which he had pledged to the investment.

Those in court have also learned that Hands traveled in chartered private jets from Guernsey to his home in Kent; he craves chocolate biscuits during important deal meetings and felt he had “no alternative” but to bring a lawsuit against his friend and trusted adviser, David Wormsley.

They’ve learned a bit about the relationship: that Hands invited Wormsley and his wife to the opera and to his villa in Italy, and that he and Wormsley went clay pigeon shooting after the EMI deal was done. 

Participants also got a clear view of how buyouts worked at the height of the credit bubble, in May 2007, just before the financial markets turned sour. The whole thing seemed to move very quickly.

Terra Firma began to get serious in early May, with Hands expressing interest to Wormsley and EMI’s former chief executive officer Eric Nicoli. The firm wanted to prepare a bid in about a week, but took slightly longer. Citi was able to approve £2.5 billion of financing for the deal in a matter of weeks.

Guy Hands has certainly put a lot on the line in his charge against Wormsley. The firm could be awarded as much as £7 billion if it wins the case, but to do that it must convince the jury that Hands’ testimony is believable. In an attempt to shatter Hands’ credibility, Citi’s lead attorney Theodore Wells has meticulously trudged through memos, emails, letters, contracts, meeting minutes and undertaken extensive cross-examination to find discrepancies or contradicting versions of stories.

During the course of the trial, all documents have been laid bare for the world to see. The veil has been lifted, revealing the private business and personal details of an investor who would otherwise – like most GPs – prefer to operate in private. As private equity goes, it’s an extraordinary spectacle. If court is the path GPs choose to solve their problems, they must be aware that there is more than just money on the line. Privacy is sacrificed and reputations are at stake.

Few believed this case would make it in front of a jury, but in the end the settlement that everyone was waiting for just did not happen. Now that it has come to an actual trial, the consequences of defeat to the losing party could be catastrophic. On judgment day, as they exit the courtroom for the last time, their misery will be there for all the world to see.