* Debt-laden Terra Firma struggling to hold onto EMI
* Boss Guy Hands has rejected offers to sell music company
* Rails against the world he once personified
* Battle with Citigroup is "personal"
By Simon Meads and Kate Holton
LONDON, June 11 One of the best ways to get
inside the head of British private equity boss Guy Hands is to
study what gift he gives for Christmas. For years, Hands has
sent friends and business associates a book he has recently read
along with a letter discussing the work. The gift is designed to
be both thoughtful and thought provoking.
Last Christmas, Hands chose "The Trouble with Markets," a
work by London economist Roger Bootle. "I was particularly
struck by his view that financial markets are distributive by
nature and provide little benefit to society, rewarding those
involved in markets out of proportion to the value of their work
to society," wrote Hands of the book, which is subtitled "Saving
Capitalism From Itself."
"That analysis seems particularly apt in view of the quick
and remarkable return of the bonus culture to the banking world.
Furthermore, in my view, such high pay levels attract many of
the most talented individuals in society thus removing them from
more entrepreneurial, creative or leadership roles in the 'real'
Cynics might laugh at the idea of Hands as a defender of the
real economy. In his heyday, the outspoken financier was known
as the king of British private equity. More than anyone, Hands
brought to Europe the idea of using cheap debt to pump
apparently miraculous returns from dowdy businesses.
Three years ago, at the height of the bubble, Hands and his
group Terra Firma [TERA.UL] bought British music company EMI --
home to artists from the Beatles to Kylie -- for 4 billion
pounds, loading up on debt to finance the deal. As the financial
crisis tightened, the deal began to unravel. Crippled by debt
and spiraling interest payments and hit by a stronger U.S.
dollar (in which some of the debt is priced), Terra Firma has
struggled to keep control of its prize.
The EMI deal has become a symbol for the worst excesses of
the boom era private equity world. Hands himself stands as "an
example of what has always been wrong with private equity," says
a former colleague at Nomura, who asked not to be identified so
he could speak frankly. "They rode the wave of a bull market in
debt but were not humble enough to know that was what they were
ALL THAT GLITTERS
Famously tough and a fiery-tempered negotiator, Hands, 50,
seems determined to hold onto his music firm. Despite debts of
3.3 billion pounds, Terra Firma has been unwilling to give its
bankers Citigroup (C.N) an inch in restructuring talks.
On June 14, Terra Firma is due to stump up the 105 million
pounds needed to push EMI back within the terms of its loan.
Failure would put the music company in the control of Citigroup,
which advised Hands on EMI and put up 2.6 billion pounds for the
purchase. The relationship between Hands and his creditors has
so soured over the past couple of years that Terra Firma is
suing Citigroup, accusing the bank and its principal dealmaker
David Wormsley of fraud. Citigroup is contesting the suit.
But if the cash injection happens -- Terra Firma seems
confident it has convinced enough of its current investors to
open their wallets again -- Hands will have another year to
nurture his real economy company back to success. "Terra Firma
is putting it all into EMI. If it blows up, they are finished.
It's that binary," said an investor who sold his investment in
Terra Firma in April because he didn't want the fund sinking
more money into the music company. "It's a high concentration,
high risk strategy."
* Video: Reuters Insider's Angeline Ong takes a look at Guy
Hands and his EMI deal. Plus: What EMI should do to increase its
* Video: Reuters Insider's Richard Lee digs through the
details of the EMI deal metrics: link.reuters.com/bar98k
* Factbox: Guy Hands: The man, his career and those deals
* Factbox: Abbey Road Studios -- recording history
People who know Hands say he has always been an outsider.
Singled out as a misfit at school, he was diagnosed with both
dyslexia and dyspraxia, a motor learning difficulty that can
Numbers presented no such challenge. Hands could find things
in a company's balance sheet that not even the company had
noticed. He graduated from Oxford with a third class degree in
politics and economics -- he dropped philosophy after a
disagreement with a professor as to whether quantity or quality
of pleasure was more important; Hands went for quantity -- and
joined Goldman Sachs as a bond trader. The year was 1982 and
London's markets would soon boom thanks to the 'big bang' of
deregulation. By 1992, Hands was heading a new Goldman unit
called Global Asset Structuring.
Securitisation was still relatively unknown in Europe -- but
Hands aimed to change that.
His plan was to work out ways to securitise assets in
unfashionable industries such as real estate. His chance came
when he joined Japanese bank Nomura, which promised him use of
its large balance sheet at a low cost and with free rein to do
deals. Hands dived straight in, financing everything from UK
Ministry of Defence houses to train engines and carriages to
high street gambling chain William Hill.
His financial wizardry was the envy of colleagues and rivals
alike. Early successes were based on his ability to identify a
target company's stable cash flows and then, once he had bought
the firm, refinance the purchase by using securitisation based
on those cashflows. This was years before securitisation became
tainted because of its association with sub-prime lending and
the credit crunch.
Nomura's principal finance group, led by Hands, also
invented the concept that a bank could compete with private
equity by using its own capital to buy assets.
Not all of the deals worked. Nomura's purchase of leading UK
consumer goods rental firm Thorn turned bad because Hands failed
to see that the rise of cheap electronic goods would kill the
television and video rental business. (Luckily, Hands found
another buyer -- WestLB's principal finance unit -- for Thorn
before things got really bad).
There were also grumbles from his colleagues. "He never
shared the juice with his team," said a former rival banker. "He
tried to make every important decision. When we did business
with him, I'm not sure there was any robust internal debate."