UK-based private equity firm Terra Firma has filed a lawsuit against Citi, alleging that the investment bank not only tricked it into paying £4 billion for music publisher EMI in 2007, but that it has also since tried to push the business into insolvency.
Terra Firma is seeking damages worth “billions of dollars”, said a source close to the process.
Citi was investment advisor and lender to EMI and sole financier to Terra Firma, earning around £92.5 million in fees from the transaction, the filing says.
Terra Firma alleges that during the auction process for EMI, Citi banker David Wormsley led the private equity firm to believe that another bidder, Cerberus Capital Management, was still in the process, when in fact all other bidders had withdrawn.
This, according to the lawsuit, led to a “fraudulently inflated” price. “Had Citi not misrepresented Cerberus’ participation in the bidding process, among other matters, Terra Firma would not have bid for EMI on that Monday,” reads the complaint.
The filing goes on to allege that since the acquisition of EMI in 2007, Citi has “recklessly disregarded” Terra Firma’s rights and interests in connection with EMI, and is trying to push it “into, or to the brink of, insolvency”.
The reason for this, it is alleged, is that a weaker EMI could be a likely merger target for US music group Warner, a deal on which Citi could potentially earn further fees. The lawsuit points to a note issued by a Citi analyst in September that highlights four factors poiting towards a tie-up between EMI and Warner.
The bank denies that it or any of its bankers has done anything wrong. It says it will defend the lawsuit “vigourously”.
EMI has to date proved a disastrous investment for Guy Hands’ firm Terra Firma. The music publisher – home to the likes of Coldplay and REM – now accounts for 30 percent of Terra Firma’s two latest funds.
Repeated attempts to restructure the £2.5 billion of EMI debt held by Citi have proved unsuccessful. The latest effort saw Terra Firma offer to inject £1 billion into the music group in return for a reduction of the same amount in the firms debt. The offer was rejected by Citi, said a source close to the situation.
In an interview in September, Hands publicly lamented the timing of the EMI deal. “If the EMI auction started two weeks later, it wouldn’t have occurred,” he told the New York Times, “We wouldn’t have bought it. We’d have 90 percent of our funds still to invest and we’d look like geniuses.”
Terra Firma declined to comment.