In an unexpected move, Citigroup Inc. took control of EMI Group but left untouched the management of the British music company that publishes such songwriters as Alicia Keys, Norah Jones and Kanye West.
Citigroup's takeover of EMI surprised many in the music industry, which expected the New York bank to wait until EMI's former owner, Terra Firma Capital Partners, defaulted on its $5.4-billion loan before wresting control of the British record company.
"Everyone thought Terra Firma had a bigger window," said Bob Lefsetz, a music industry analyst.
Citigroup's move Tuesday short-circuited a potentially lengthy bankruptcy process triggered by a default on the loan. Instead, it gave the bank absolute control of EMI — literally overnight.
In a debt-for-equity swap executed Monday, Citigroup wrote off 65% of EMI's debt in exchange for full ownership of the 114-year-old company, putting Terra Firma and its chairman, Guy Hands, out in the cold.
EMI was operationally profitable and able to pay the interest on its loan, but struggled to make a dent in the principal. The deal leaves London-based EMI with a little more than $1.9 billion in debt.
"It has given us one of the most robust balance sheets in the industry," said EMI's chief executive, Roger Faxon, in a statement.
Citigroup signaled that it would not interfere with EMI's operations, which generated $2.64 billion in revenue in its last fiscal year, ended March 31. It posted a $534.9-million profit before interest, taxes, depreciation and amortization, up from $469 million a year earlier.
"It is business as usual for everyone at EMI," said Stephen Volk, Citigroup's vice chairman and the new chairman of EMI's new holding company, Maltby Acquisitions.
Citigroup is largely expected to sell EMI before the end of the year.
Among its potential buyers is Warner Music Group, which is contemplating its own sale and has hired Goldman Sachs to vet possible offers from interested suitors, including Kohlberg, Kravis & Roberts.
One possible outcome is that Warner jettisons its Warner/Chappell Music Inc. publishing business and uses the proceeds to purchase EMI's valuable music catalog, which includes works by Pink Floyd, Frank Sinatra and The Beatles.
"The logic is for KKR to buy Warner's publishing assets, and then merge Warner and EMI," Lefsetz said. "Warner is dying to get their hands on the EMI catalog."