The financial results released yesterday by EMI showed a company with healthy core businesses but hit hard by goodwill impairment charges triggered by the market valuations it received from the winning bids in the auction to sell the company.
On Nov. 11, 2011, Citigroup agreed to sell publishing to a consortium led by Sony Corp. of America for $2.2 billion (1.41 billion pounds) and recorded music to Universal Music Group for 1.2 billion pounds. ($1.92 billion) The former sale closed on June 29, while the latter is still awaiting regulatory approval. (Except for the EMI publishing close date, all rate conversions in this story are based on March 31 rates as calculated by OandA.com)
In the year ended March 31, EMI narrowed its loss to 349 million pounds ($558 million) from the prior year when it had a pre-tax loss of 529 million pounds ($845.7 million), while sales increased 1.3% to 1.47 billion pounds ($2.35 billion) from 1.45 billion pounds ($2.32 billion). The losses in both years were attributed to write-offs for impaired assets.
Overall, EMI's loss for the year was 330 million pounds ($513.13 million), versus 390 million pounds ($606.3 million) in the prior year, when its U.K. tax benefits were much stronger than the most recent year.
Otherwise, EMI produced earnings before interest, taxes, depreciation and amortization of 290 million pounds ($463 million) versus EBITDA of 306 million pounds ($489 million) in the prior year.
The company produced overall operating profit of 133 million pounds $206.8 million) for the year ended on March 31; that was almost double the prior year's total of 69 million pounds ($107.3 million).
Within the EBIDTA total, EMI's recorded music operation contributed EBITDA of 158 million pounds ($252 million) in EBITDA on sales of 1.035 billion pounds ($1.6 billion). After depreciation, amortization, restructuring charges are deducted, recorded music produced an operating profit of 58 million pounds ($90.2 million), but after good will impairment charges, the recorded music operation produced a 45 million pound loss ($70 million).
As for EMI Music Publishing, the company produced 132 million pounds ($211 million) in EBITDA on sales of 434 million pounds ($674.8 million), but after deducing depreciation, amortization and restructuring charges, the company produced an operating profit of 75 million pounds ($115.6 million). And with the further assessment of 269 million pounds ($418.3 million) for impairment charges, the publishing unit produced a 194 million pound ($301.7 million) loss. Meanwhile, EMI's gross profit, also known as net publisher's share, was 203 million pounds ($315.7 million), which means that the Sony-led consortium paid a multiple of nearly 7 for the company.
Other interesting tidbits in the report, when Citigroup agreed to sell the companies last Nov. 11 in separate deals with the Sony-led consortium and UMG, they said the Sony sale contract for publishing called for the sale to be closed within 12 months and it did; But the UMG deal to buy EMI's recorded music operation, which is still awaiting regulatory approval, had 22 months to close. If the UMG deal is not closed by Sept. 11, 2013, Citigroup could retain EMI's ownership, according to the report. But sources say in any event, UMG has until Sept. 10 of this year to make payment for EMI, regardless of what happens with regulatory approval and ownership.
While a source confirms that this was negotiated, no reason was given why. But in pure speculation, the longer period could be in case UMG doesn't get regulatory approval and EMI recorded music has to go through the sale process again.
Moving along in the report, EMI passed the going concern test, which means it has adequate resources to continue operating for the foreseeable future.
The report also noted that the company had loans and borrowings of 953 million pounds ($1.48 billion) at the end of the year, versus 1.2 billion pounds ($1.87 billion) at the end of the prior year. The loan facility includes two covenants, one that measures gross debt as a multiple of EBITDA and the other which measures EBITDA as a multiple of interest costs, with each measured for each division on a quarterly basis. While it didn't give those target ratios, the document reported that during the year ended March 31, the covenants were all met with significant headroom to boot.
Those covenants are not as strict as the ones that proved to be the bane of Terra Firma's existence when it owned EMI, but it did say that the ones for recorded music had since been revised but didn't break out how. Nevertheless, the report says it will pass the covenant test for the next six quarters.
The report also noted that total staff costs were 271 million pounds ($419.8 million), of which 220 million pounds ($342.1 million) were attributed to wages, with the recorded music operation having 2,649 staffers on March 31 and publishing with 557 staffers.
Finally, EMI carries 33 million pounds ($51.3 million) in assets from investment in associates like Music Choice, with that being up from 29 million pounds ($45.1 million) in the prior year.