Joss Comments on EMI Loss

"There are whole nations that the GNP doesn't even amount to this...... Oh dear" .....  Joss xoxo

EMI ANNOUNCES 1.75 BILLION LOSS So, the doom and the gloom surrounding EMI only grew yesterday following yesterday morning's news that the London-based major's owners Terra Firma were asking their financial backers to pump another 100 million into the flagging music company to enable it to meet its loan repayment commitments to Citigroup. As the day progressed it was revealed that the major was about to announce a pre-tax loss of 1.75 billion for the financial year to the end of March 2009 - which it then did - which is a pretty magnificent sized hole, even for the struggling record industry. No wonder there are concerns the company will stumble on its loan terms, enabling Citigroup to seize ownership of the major for itself. And no wonder there is speculation that some of Terra Firma's financial backers are ready to bail on the music company. That said, the details behind the 1.75 billion losses reduces the drama slightly. A billion of the losses were caused by the firm's accountants insisting on a so called 'impairment charge', whereby the perceived value of the EMI catalogues and the company's corporate reputation was dramatically cut, having a serious impact on the firm's bottom line.

Meanwhile ongoing restructuring costs used up over 100 million and interest payments to the aforementioned Citigroup on the loan Terra Firma took out to buy EMI in 2007 cost the company several hundred million more. What this means is that, while EMI's record labels continued to flag in 2008/2009 (this was before the big Beatles reissue remember), a boost in music publishing revenues meant the company in itself was just about operational. It was accountancy recalculations and costs directly associated with Terra Firma's 2007 acquisition that caused a bulk of those dramatic losses. But while rational thinking can reduce the drama of the '1.75 billion in losses' headline a little, that's not to say EMI isn't on the brink as we write.

According to the Telegraph, KPMG, the auditors of Maltby, the holding company through which Terra Firma own EMI, have said that the music company is more likely than ever to breach its lending terms to Citibank, while they also raise concerns about the 200 million deficit in the firm's pension fund. Those facts, the accountants say "cast significant doubt on the group's ability to continue as a going concern". All of which explains why Terra Firma and its top man Guy Hands are so keen to persuade their financial backers to cough up some extra cash. But many reckon that even if 100 million is forthcoming, that cash will only buy a limited amount of time, and too little time to turn round EMI's fortunes before another cash crisis related to commitments on the Citigroup loan. A fact which might make Terra Firma's investors wonder if now is the time to cut their losses.

And, of course, as we pondered yesterday, all this uncertainty will make it difficult for EMI to sign any of the next big thing talent that has the most profit potential for a record company. What manager will want their band signed to a company which might not exist in its current form in a year's time? All this talk of doom and gloom - even if not entirely founded just now - is in danger of becoming a self-fulfilling prophecy. A Warner merger like that we outlined in yesterday's CMU Daily is looking more and more like an attractive proposition, even if it would require Citigroup to turn some of their debt into equity, and Terra Firma to relinquish control to Warner Music's Edgar Bronfman Jr and see their overall stake dramatically reduced.

Presumably all those former senior EMI types forced out by Terra Firma and Hands after their 2007 acquisition must be smiling a little this morning. While it's true those former execs also had a role in creating EMI's current insecure state, the arrogant "the problem with you music people is that you don't understand business" attitude of Team Terra Firma in 2007 is now looking a little silly. Hands will blame the credit crunch for his failure, of course, though that was only part of the problem. The Terra Firma man was very astute when it came to identifying the problems facing EMI and the wider record industry, but less good at figuring out the solutions.