Terry Guy Hands has lost his lawsuit against Citigroup, wherein he accused Citigroup of defrauding his private equity group, Terra Firma Capital Partners, by lying about the number of competing bidders during the auction of the record company EMI, for which Terra Firma paid $6.8 Billion. This was one of those top-of the market deals (August 2007) that always goes pear-shaped. From the NYT :
That bad business decision has cost Mr. Hands dearly. The 113-year-old EMI, once home to both the Beatles and the Rolling Stones, has struggled mightily since it was bought by Mr. Hands. He testified that he had 60 to 70 percent of his wealth tied up in EMI. His fund, Terra Firma, has lost about $2.5 billion on the investment.
From a market participant’s point of view, this is something of a lose/lose outcome: it’s hard to see why IBs or investors would court the litigious and money-losing Mr Hands when he wants to raise capital for his next deal.
Nor is it so great for the sell side, as it draws attention again to the conflicts of interest inherent in the universal banking model (Philip Augar, FT):
The Citigroup-Terra Firma case is a timely reminder that a golden opportunity to address the problem has recently been missed…the banking architecture escaped major change in the Dodd-Frank Act of 2010.
Nor for EMI: as is the way with these value-destroying PE deals (for instance, the Rolling Stones were so unimpressed with Mr Hands that they quit the label, after, what, 40 years), EMI has devolved from a fabled recording company to a piece of unloved collateral. It is most unlikely to be managed with tender loving care.
There was, though, one other eyecatching detail in the NYT’s report of this battle between two equally unappealing Big Capitalists:
In his closing argument on Wednesday, Mr. Wells acknowledged that his client also got caught up in the frenzied boom-era deal-making by financing the EMI buyout, a transaction on which it earned more than $100 million in fees. But Citigroup has since written down the value of the EMI loans held on the bank’s books by $2 billion.
Well, that looks like exactly like a principal writedown to me.
“We should not have loaned” Mr. Hands the money, Mr. Wells said. “We have to live with our own bad business decision, and so does he.”
Now then, Citi, how about applying the same reasoning to your U.S. mortgage portfolio?