Terra Firma sues Citi over 'fraudulent' auction for EMI

US banking giant accused of lying during bid process for British music company
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The Independent Online

The American investment bank Citigroup has vowed to "vigorously defend" itself against the £1.5bn lawsuit filed by the private equity owner of EMI, following its troubled £4bn acquisition of the music group.

Terra Firm, the investment vehicle owned by the multi-millionaire British financier Guy Hands, has accused Citi of lying about another bidder being involved in the auction of EMI in 2007, which led the private equity firm to pay a "fraudulently inflated price" for the entertainment company.

In one of the most high-profile legal spats of recent years, Terra Firma claims Citi also wanted to drive EMI into, or to the brink of, insolvency so that it could engineer a merger with its rival Warner Music. Citi vehemently denied the allegations. A spokesman said: "The suit is without merit and neither Citi nor any of its bankers have done anything wrong here. We will defend against this law suit vigorously."

Neither Terra Firma nor EMI would comment last night.

Citi loaned Terra Firma £2.6bn to finance the EMI purchase in May 2007, which it completed that August. EMI, home to recording stars including Robbie Williams and Katy Perry, has been hit by the wider downturn in CD sales but has suffered some internal problems. It is reported that widespread cost-cutting at the company has left it with a lack of resources in some areas to handle its artists.

Three weeks ago, Terra Firma and its investors are thought to have offered to put an additional £1bn of equity into EMI, but it was conditional on Citi writing down the value of the loan by about £1.5bn. Citi is believed to have rejected the proposal.

In the legal claim in which Terra Firma is seeking compensation in lost equity, it claims Citi has earned £92.5m through multiple capacities on the deal. It said: "Despite garnering these proceeds, Citi, during the entire period from May 2007 continuing to the present, has recklessly disregarded Terra Firma's rights and interests in connection with the EMI transaction and has in the process harmed Terra Firma."

Terra Firma refers specifically to the role played by David Wormsley, the then head of UK investment banking at Citi, in the EMI deal. It accuses him of "misrepresenting" that there was another bidder, Cerberus Capital Management, involved in the auction. Mr Wormsley is accused of contacting Mr Hands shortly before, telling him he would miss out on the deal unless he made a bid of 265p a share by 9am on 21 May 2007. According to the legal papers, however, the Citi executive knew Cerberus had told EMI it was pulling out.

In the filing, Terra Firma says EMI tripled its earnings before interest, tax, depreciation and amortisation from 2008-9 and also improved its cashflow.