* 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 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.
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
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
(Editing by Hans Peters and Karen Foster)