UPDATE 2-EMI needs fresh cash as licensing talks collapse

Wed Mar 31, 2010 11:45am EDT

* Talks end with Universal and Sony-sources

* One source says offers were not acceptable

* EMI faces covenant breach on Citigroup loan

(Adds details on covenant test, background)

By Simon Meads and Kate Holton

LONDON, March 31 (Reuters) - Struggling music major EMI has failed to clinch a licensing deal for its North American rights, sources said, making a covenant breach inevitable and pushing its owner Terra Firma [TERA.UL] back to investors for more cash.

The business -- owned by Guy Hands' private equity group -- is racing to secure cash before Wednesday's financial year end to meet a test on a $2.6 billion loan from Citigroup (C.N). It had been holding separate talks with Universal Music Group (VIV.PA) and Sony (6758.T) for a licensing deal.

But two people familiar with the matter told Reuters on Wednesday the talks had fallen through at the last minute. One of the two sources said the deal was too complicated for the two sides to agree.

"It was just fraught with complications," the source said, speaking on the condition of anonymity.

The other source said the offers made for the licensing agreement were not acceptable.

Terra Firma has already written to investors to tell them it may need to inject over 100 million pounds ($150.7 million) into the business to keep it within its covenants until March 2011 or risk Citigroup seizing control.

EMI -- which has lost acts such as the Rolling Stones and Radiohead since Terra Firma took over -- is working on a new business plan, which Terra Firma will need to recommend to investors before asking for follow-on capital.

With EMI now set to fail the end-of-year covenant test, Terra Firma will have until mid-June to inject money to get the business back within the terms of its debts.

NET LOSS

EMI, now the smallest of the four major record labels, has been hit hard like all music companies by illegal downloading and the move from album sales to single digital tracks.

Its woes were intensified in February, when it reported a 1.56 billion pounds net loss for the full year.

EMI has traditionally been weak in the United States -- the world's largest and most important music market in terms of breaking new artists -- and its new owners have offended many of its oldest acts by its approach.

The company has also recently lost a case brought by Pink Floyd over royalties payments, which prevents EMI from selling single downloads on the internet from the British rock band's concept albums.

Previously, people familiar with the negotiations had said Universal and Terra Firma were discussing a licensing fee estimated around $300 million over five years.

Universal, Terra Firma and Sony all declined to comment.

Warner Music Group WMG.N, the world's No.3 music company, is believed to be more interested in buying EMI's recorded music business than getting a license.

Earlier this month, Reuters reported that Warner had held talks with KKR/Bertelsmann KKR.AS about a joint approach to Terra Firma to buy both the recorded music and publishing assets of EMI. (Editing by Hans Peters and Karen Foster) ($1=.6635 Pound)