Guy Hands's $4bn purchase of EMI sounded off-key from the start

One of Britain's most successful private equity investors did not understand the culture of the music business

EMI could be seized by Citigroup after Guy Hands lost his legal fight against the US investment bank. In the wake of Hands's dramatic defeat in New York, analysts said it was unlikely that investors in his private equity firm Terra Firma would now stump up more cash to prevent the firm from breaching the terms of banking covenants agreed with Citigroup, which is owed £3bn.

If he fails to make good those covenants, which could be breached as early as March, Citigroup will take control of EMI and sell it to a rival music group such as Warner Music of the US, which has long coveted the British label.

In the meantime, Hands has other options. He could use his own money to retain control of the company for a while and help to negotiate a sale himself, or could simply hand the company over to Citigroup, resigned to the knowledge that he cannot save the heavily indebted group whose artists include Robbie Williams and Coldplay.

Another scenario is that he negotiates a capital restructuring with Citigroup, which has been unable to syndicate the loans since the credit markets seized up in 2008. This would involve a debt-for-equity swap that would see the US bank exchange debt for shares in EMI, as well as bringing in outside investors. Conceivably, Hands could retain a tiny stake, giving him the chance to save face and perhaps profit from some of the upside if EMI were acquired by Warner.

Whatever happens, his purchase of EMI for £4bn in 2007 will go down as one of the worst deals of the boom years. From the beginning, things went wrong for Hands: key artists criticised his bean-counter approach and artists such as Radiohead and Paul McCartney took their business elsewhere.

There was also an air of comedy in the early days when he lambasted EMI for spending £200,000 a year on "fruit and flowers", unaware these were a euphemism for payments for drugs and sex.

Even by Hands's own admission, the purchase of EMI has been less than successful. Terra Firma investors, including Hands – who has shelled out millions of his own cash – have written off most of their £1bn equity investment. In the music industry, the company has been slated for being a financial basket case, earning itself the dubious sobriquet of "Every Mistake Imaginable".

Hands was criticised for his lack of understanding of musicians and artists, as well as for dismissing scores of artist and repertoire (A&R) agents, forcing through 3,000 redundancies and cutting too heavily from the marketing and advertising budget.

EMI has lost ground to Warner in the UK, but has increased its market share in the vital US market. Although the label has recently seen its fortunes improve, it reported an annual loss of £624m for 2009/2010.

Hands may also regret pushing so hard to have the case heard in New York, a ploy to avoid jeopardising his non-domicile tax status. He moved to Guernsey to reduce his tax bill, but his children and wife still live in the UK and he sees them less often than when the family lived together in Kent.Up until the EMI purchase, Hands had been one of Britain's most successful private equity investors, buying and selling assets such as Angel Trains and Odeon cinemas at a huge profit.


Richard Wachman

The GuardianTramp

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