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Change of tune at EMI

Guy Hands' Terra Firma has endured a torrid time since its acquisition of EMI. Now it is changing its management. Nick Clark reports

EMI Music's chief executive has shocked the market by quitting weeks before the group was due to draw up a growth plan critical to its future. The beleaguered music label has appointed the former ITV chief executive Charles Allen to replace him.

Sources close to the situation denied there had been a "bust-up" leading to Elio Leoni-Sceti's departure from the label whose acts include Lily Allen, Coldplay and Robbie Williams. "EMI needs a chief executive who is committed to the business in the long term. Elio thought he had done his bit. He leaves by mutual agreement," one source said.

Mr Allen, who has been non-executive chairman of EMI Music since January last year, will become executive chairman when Mr Leoni-Sceti leaves on 31 March. The group insider said Mr Allen was the "obvious appointment. He understands the media and was already a fairly active chairman".

EMI announced that Mr Leoni-Sceti was leaving the company after 18 months, saying he "successfully led EMI Music through the first phase of operational turnaround". Mr Leoni-Sceti called the label a "wonderful business with a great team and new creative and operational momentum," adding: "My job here is now done and it is time for me to move on."

Yet the news left analysts scratching their heads. "This has come out of the blue. Something must have triggered it," one said, adding that Mr Leoni-Sceti was unlikely to want to tie his reputation to the company long term. Only this month, the former European president of Reckitt Benckiser had said in an interview: "I'm very dedicated to EMI."

Keith Jopling, a director with Truth Consulting who specialises in the music industry, said: "Leoni-Sceti was given an almost impossible job, but he did fantastically well. It is a notoriously difficult business for outsiders to come in and change."

The company said that on an operational level it had trebled profits in three years, and was still signing up artists. Yet this has been clouded by the company's levels of debt and its legal battle with the investment bank Citi. Mr Leoni-Sceti sent a letter to Guy Hands in October, saying its legal issues made it difficult to sign new acts, and staff morale had fallen to an all-time low.

EMI lifted operating profits to £163m for recorded music in its last financial year, up from £51m before Mr Leoni-Sceti joined. Yet pre-tax losses hit £1.7bn for the year to the end of March 2009, last month, including £1bn in writedowns.

"Under his stewardship revenues and profits have grown, but these struggled to service the debt covenants that EMI needs to meet every quarter. He hasn't been able to address EMI's long-term strategic issues," Mr Jopling added.

The EMI deal was done at the height of the bubble for leveraged deals carried out by private equity, when the Terra Firm chief Mr Hands masterminded the £4.2bn buyout in the summer of 2007.

The group is locked in a legal dispute with Citi. The US bank, which provided £2.5bn in debt for Terra Firma to buy EMI, also advised the music label on its defence against Terra Firma. Mr Hands alleges that the US bank led Terra Firma to believe other bidders were interested, pushing up the price. Citigroup denies the claims. The case is currently with a judge in New York, who is set to rule by the end of the month whether it will stay in the US or be heard in London as Citi requested.

The first job Mr Allen will oversee is presenting Terra Firma with a business plan for long-term growth at EMI. If the plan is approved, Mr Hands will then use it to persuade investors to inject £120m. He has until 14 June to raise the sum before defaulting on its loans, which could see Citigroup take ownership of the company and potentially break it up. There have been strong rumours that Warners is interested in a deal. EMI is also involved in a court case with an act that has been signed to its label for 40 years. Pink Floyd took EMI to court related to royalties from digital downloads of its tracks. It also emerged that the group is thinking of leaving EMI, along with Queen, over concerns on the state of the company's finances.

Radiohead quit the label shortly after Terra Firma's takeover, saying the group did not negotiate seriously.

A source close to the label said: "You will always find artists ready to slag off the record labels. Some didn't like the idea of private equity when EMI was taken over, but really it's about money. Most top artists are more money-conscious than bankers."

The survivor: Allen back in the big time

Charles Allen's new role at EMI Music marks his first return to an executive role since he quit ITV more than three years ago. A source who has worked closely with Mr Allen backed him to make a positive impact at EMI following Elio Leoni-Sceti's surprise departure, saying: "If you want someone to come in and knock a company together fast, you would struggle to find a better candidate. He has done it, and more than once."

As the chief executive of Granada, a post he held from 2001, he oversaw the merger with Carlton Communications, creating ITV in its current form and taking on the role as chief executive. He slashed costs by reducing headcount and disposing non-core assets and outlined an ambitious strategy for modernisation. Yet he was faced with a declining market share in the onset of the multi-channel digital revolution and criticism that programming was on the decline.

Towards the end of his reign at ITV, the pressure from investors as the share price fell, defence against potential suitors – including a private equity vehicle fronted by Greg Dyke – and the increasing criticism over his strategy prompted Mr Allen, right, to step down . The former ITV insider said: "Even he recognised that he had been at the helm for so long he had become a talisman, and so stepped down. His record stands up better now in hindsight than it did then."

Mr Allen was brought up in Hamilton, Scotland, and after his father died of a heart attack when he was 14, university was out of the question. Initially he trained as an accountant while at British Steel before moving to Compass – which later prompted John Cleese to refer to him as the "upstart caterer". He joined Granada in 1991. "He gets numbers. Commercially he knows how to drive costs out of the business but he does understand how to run and develop the creative side," his former colleague said, pointing out that X-Factor and Pop Idol were commissioned under his watch.

At EMI, keeping hold of the talent will be critical, but he also has to come up with a business plan that will convince investors to inject more capital. Claire Enders, the founder of Enders Analysis, said Mr Allen was used to complicated deals. "He has a lot of financial experience, which is what is required for EMI. He's a good negotiator and the financial situation with the company means this will go down to the wire." She added: "It will be a hard-sell anyway, whoever is doing the selling."