M&A houses that helped fuel the leveraged buy-out boom in the months leading up to mid-2007 will doubtless have breathed a sigh of relief last week when Terra Firma, led by Guy Hands, lost its court case against Citi.
The UK private equity firm claimed that David Wormsley, Citi’s head of UK investment banking, misled it into overpaying for music publisher EMI in May 2007.
Had Terra Firma, which bought EMI for £4bn, won the case, other sponsors of struggling, debt-laden companies bought during the market’s bull-run might have considered suing their M&A advisers too. But commonsense prevailed. A New York eight-man jury unanimously found in Citi’s favour.
Terra Firma’s case was always dubious. It rested on the allegation that Wormsley lied about there being a rival private equity bidder for EMI, forcing Hands to increase his offer. As far as Citi was concerned, Terra Firma was simply trying to make up for what has turned out to be a poor investment. Hands says that EMI’s equity is now worth just £1.8bn, far less than the £2.5bn owed to Citi for financing the buy-out.
The US bank said after the verdict that the case had been “nothing more than a misguided attempt to gain leverage in debt restructuring negotiations”.
The slanging match in court has been entertaining. But the significance of the case goes further than one financier’s failed attempt to take on one of the big beasts of the banking industry.
The EMI buy-out epitomised the worst of the LBO market’s heady days: a highly leveraged, multi-billion pound takeover of a company in a cyclical sector right at the peak of the market. For that, Citi was arguably as much to blame as Hands.
And the bank was painfully aware of its error almost immediately, writing down the loan as soon as the takeover was complete when it was unable to syndicate any of it. That EMI has not already technically defaulted is almost entirely down to the loan being covenant-lite — another notorious feature of the go-go days — and not the company’s performance.
But although neither of the parties comes out of the saga well, the case could still do some good. At a time when some bankers are beginning to mutter darkly about over-leveraged deals, Terra Firma’s defeat should serve as a timely warning to all those tempted to overbid — and the banks that are tempted to fund them.
