-- EMI's pension fund has been a cloud hanging over Terra Firma since the private equity firm acquired the music company. Now, Britain's pension regular is calling on Terra Firma to fill a £250 million gap in funding. Extra payments into the fund would probably come from the cash generated from the company's operations - it would not assume more debt to deal with the matter. For a company regularly short on its debt covenants and in need of equity cures, to divert cash to pension obligations would make its tough situation even worse.

EMI has acknowledged the pension is underfunded. But the amount it is underfunded is a controversial issue. In the past, Terra Firma had said EMI was running a pension surplus. The 2008 Maltby Report claimed a healthy surplus as well. Estimates vary in part because of different assumptions about the future earnings of the fund. If expected returns on the fund exceed future obligations, the fund is considered to be in good health. In the opposite is true, the fund is considered to be underfunded.

Back in 2008, The Times reported Terra Firma was in talks with several groups about a buyout of the underfunded pension fund. Since then, the head of the pension quit after Terra Firma reportedly refused to make meet his demands for a £170 million payment to the pension fund. The pension fund has 22,000 members but only about 500 are currently working for the company.

-- Does Citigroup actually want to take over EMI? Even though there would be buyers waiting if EMI defaulted on its debt and was taken over by Citi, one unnamed person told the Financial Times that Terra Firma is betting that Citi doesn't want to take over EMI. "We have seen throughout this crisis that banks have been reluctant to take control of companies in these situations, and Guy is counting on that to push Citi into doing a deal on EMI's debt," said the source.

In the past, Citi has balked at Terra Firma's offers to restructure EMI's debt. But less debt - through restructuring or a favorable outcome in its lawsuit against Citi - would make EMI more attractive to potential acquirers such as Warner Music Group. So it's not surprising that the London Evening Standard reported on Monday that Terra Firma has opened a dialogue with Warner in recent months. Warner wants EMI but would doesn't want its current debt load. Change the amount of EMI's debt and you change the likelihood Terra Firma can unload the company.

It should be noted, however, that Terra Firma has publicly stated only that it plans to stay with EMI through its turnaround. It has given no indication that it wants to sell EMI.

Questions? Comments? Let us know: @billboardbiz

Print