Showdown in New York

As the private equity trial of the century kicked off in New York, the courtroom was treated to some unprecedented insights into the business of boom-era private equity. By the time this magazine hits desks around the world in early November, a conclusion will most likely have been reached. As of press time the trial was already proving illuminating.

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 were 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.

Guy Hands

The trial 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.

“From a business point of view of Terra Firma, the realities of our business are that it relies on banks. Suing the banker is something you do as a very, very last resort,” Hands said. “On a personal level David Wormsley is someone who we worked with very successfully over a very, very large number of years. To sue someone who is a friend … is a difficult thing.”

Attendees learned a bit about the relationship between the two men on opposite sides of the courtroom: 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. 

Those present 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 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 meticulously trudged through memos, emails, letters, contracts, meeting minutes and undertaken extensive cross-examination to find discrepancies or contradicting versions of stories.

During the early stages 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. 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. Regardless of the outcome – whether it is Hands or Wormsley who leaves the courtroom with their heads held high – the trial will have proved an extraordinary spectacle for the private equity industry.