Terra Firma’s EMI Moves: S.O.P.


Terra Firma, the private equity company that just bought EMI, has no idea what they’re doing and is in panic mode! So says the NY Post this morning: “Terra Firma On Shaky Ground With EMI”. And while that must sound comforting to those who think music companies should be run by music people, not numbers guys, the Post’s evidence here is pretty weak:

• Item: Terra Firma is reportedly looking to bring on more partners so it can extract some of $1.5 billion in equity it sunk into the $4.7 billion deal this summer. The Post argues that this means Terra Firma is “disillusioned” with EMI, just weeks after completing the deal. To us this sounds like PE 101: Try to extract your initial investment as soon as you can — as Tom Lee and partners did after buying Warner Music Group from Time Warner (TWX) a few years back.

• Item: Terra Firma is looking at personnel cuts and other cost-saving measures, including ditching EMI’s distribution operations. But cost-cutting at EMI wouldn’t be news: The only real news would be if Terra Firma didn’t take an axe to the company. We know that Terra Firma execs have been going over EMI’s payroll with a sharp red pen since last spring. Ditto the distribution option.

Unfortunately for both Terra Firma and EMI’s employees, outsourcing EMI’s remaining distribution centres (it already got rid of its own distribution operations outside of the U.S. and the U.K. years ago) won’t do much for the bottom line: A knowledgeable source estimates that such a move would save the company less than $10 million a year. That’s not going to move the needle much on a $3.5 billion (revenue) company.

We remain worried that Terra Firma paid too much for an ailing company in a shrinking industry — similarly sized WMG, for instance, has a market cap of just $1.6 billion. But hard to conclude, based on the Post’s evidence, that Terra Firma execs have reached a similar conclusion.