Pink Floyd, Queen May Ditch EMI as Buyout ‘Implodes’

Pink Floyd and Queen, bands that have been with EMI Music for about four decades, may head for the door, according to two people familiar with their talks, as concern mounts about the U.K. record label’s finances.

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Pink Floyd, whose catalog includes such albums as “Dark Side of the Moon” and “The Wall,” and Queen, with its best- selling single “Bohemian Rhapsody,” have met with other major record labels about leaving, said the people, who spoke on condition of anonymity because the discussions are private.

Guy Hands, whose Terra Firma Capital Partners Ltd. bought EMI for 4 billion pounds ($6 billion) at the height of the buyout boom in 2007, has until June to convince the firm’s investors to inject new capital to keep EMI afloat. Without that funding, EMI may end up in the hands of creditor Citigroup Inc. and may merge with a rival, analysts said.

“This is how a company implodes,” said Claire Enders, a former EMI executive and the head of Enders Analysis Ltd., a London-based music and entertainment research firm. EMI rivals Universal Music Group, Sony Music Entertainment and Warner Music Group Inc. are likely courting the label’s top artists such as Lily Allen and Katy Perry, she said.

Adding to the turmoil, Hands is suing Citigroup, saying the bank tricked Terra Firma into buying EMI in 2007. The company also today said EMI Music Chief Executive Officer Elio Leoni- Sceti will step down effective March 31. It asked 53-year-old Charles Allen, currently non-executive chairman, to assume the role of CEO.

Under Pressure

In a letter to Hands, part of court documents filed Feb. 4 in New York, Leoni-Sceti had written that morale at the company had reached a low and that artists were questioning whether to stay.

EMI is in talks with artists, “all of whom are questioning to some degree whether it is wise to continue a relationship with EMI,” Leoni-Sceti wrote in the Oct. 2 letter, saying their concerns were sparked by a Citigroup report on EMI’s prospects. Hands had named Leoni-Sceti to the top job in July 2008 with no music industry experience.

Neil Bennett, a spokesman for EMI, the world’s fourth- largest record company, declined to comment for this story.

Mark Fenwick, the manager for Pink Floyd, declined to discuss the contract with EMI. The group, which first signed with the label in 1967, last year sued EMI and Terra Firma for what it said were miscalculated royalty payments. At a hearing in London yesterday, the band’s lawyer argued for royalties on online and single-track sales.

Jim Beach, the manager of Queen, declined to comment on plans for its EMI contract. Queen signed with EMI in 1972.

Disappearing Revenue

Pink Floyd’s exit may be especially painful for EMI because of the loss of future sales of the band’s works, such as the still-popular 1973 album “Dark Side of the Moon.”

“That’s just a constant revenue stream that would suddenly disappear,” said Larry Kenswil, a music industry attorney for Loeb & Loeb in Los Angeles.

EMI’s management style since Hands took over sparked outbursts from several top artists, including Lily Allen and Joss Stone. Industry executives have accused Hands of running the label like a hedge fund rather than a creative shop.

Terra Firma’s acquisition of EMI Group Ltd. just weeks before the credit markets collapsed in 2007 was the firm’s largest. Hands started the firm in 2002 raising 2.1 billion euros ($2.9 billion) for investments such as the German rest- stop chain Autobahn Tank & Rast Holding GmbH.

Artistic Differences

Radiohead and the Rolling Stones abandoned EMI when Hands took over, and as contracts with Pink Floyd, Queen and Robbie Williams come up for renewal, EMI faces the prospect of one or all leaving.

EMI Grammy Award winner Joss Stone last month asked on her Web page, “What manager will want their band signed to a company which might not exist in its current form in a year’s time?”

“The mistake Hands made is basically coming into a business he didn’t fully understand,” said Colin Lester, who signed the Arctic Monkeys and Travis and manages Grammy Award- nominated Craig David. “It’s important to have relationships with artists and it’s not based on the same matrix as other businesses.”

EMI, home to the Beatles, last month posted a 1.5 billion- pound annual loss and said its liabilities exceeded assets by 408 million pounds as of March 31, 2009. Terra Firma has asked EMI for a new business plan and needs the approval of 75 percent of investors to put more capital in by end-June.

Back to Warner?

Speculation that Warner Music Group will bid for the U.K. music company has also heated up. Should EMI breach debt covenants, Citigroup could take control of the company and sell it to Warner Music. New York-based Warner Music made way for Hands to buy EMI after abandoning a takeover in July 2007. On Feb. 9, Warner Music Chief Executive Officer Edgar Bronfman Jr. said regulatory hurdles shouldn’t prevent his company, the world’s third-largest record label, from buying EMI.

“The current expectation is that EMI will cease to be owned by Terra Firma and Citigroup will take it over and sell it Warner,” Enders said. Amanda Collins, a spokeswoman for Warner Music, declined to comment.

To cut debt, EMI considered selling Abbey Road Studios, where the Beatles recorded most of their songs, only to withdraw the plan last month after a public outcry led to the site being put on a protected list by English Heritage.

Lily Allen, Robbie Williams

“They could have a yard sale and sell the gold records off the wall, but I don’t think that’s going to solve the problem,” said Ted Cohen, a former senior vice president of EMI’s global digital operation.

For artists renegotiating contracts, the lure of a financially sound company such as Universal Music or Sony is obvious, said Jonathan Shalit, who manages Myleene Klass and Jamelia. “It doesn’t take a rocket scientist to figure out that you’d sign with a solid company.”

Lily Allen early last year told The Word magazine she “hated” Terra Firma. “They don’t know how to run a creative business. They are killing us, frankly.”

Robbie Williams’s manager, Tim Clark, who two years ago said Hands behaved like a “plantation owner,” has changed his tune, telling Music Week magazine in February that EMI “really got a grip with things” on its operational side. Clark didn’t respond to messages seeking comment.

‘Period of Flux’

EMI has had some victories. Lady Antebellum, a country band signed to EMI, was this year’s first to sell a million albums in the U.S., according to Nielsen SoundScan. It was the fastest to cross the million-mark since 2005, SoundScan said. EMI has also had 200 new signings globally in the last 18 months, including Cypress Hill and American Voodoo.

Still, Scott Booker, manager of the Flaming Lips, said the cloud over Terra Firma and EMI does influence whether he would advise one of his acts to sign with the label.

“Would I sign to EMI right now? No,” said Booker, who also heads of the Academy of Contemporary Music at the University of Central Oklahoma. “I’d wait to see where the dust settles; there is going to be a period of flux over there. Why get in the middle of that? They just can’t afford to promote and market the same way they used to.”

Changing Hands

EMI’s challenges come against the backdrop of the music industry grappling with declining CD sales amid piracy and a shift in consumer preference for digital downloads. U.S. compact disc sales fell 65 percent from 2000 to 2009, according to SoundScan. Vivendi SA’s Universal Music Group, the world’s largest record label, reported revenue fell 6.2 percent last year to 4.36 billion euros.

EMI’s Leoni-Sceti has said the company’s revenue will rise in the current year, after gaining 4.6 percent in the 12 months ended in March 2009. Earnings before interest, taxes, depreciation and amortization more than tripled to 163 million pounds. EMI has said it sees earnings by that measure rising to 200 million pounds this year.

After buying EMI, Hands changed the management team. Former CEO Eric Nicoli left shortly after Hands bought the company. He was replaced by cleaning-products executive Leoni-Sceti, the former head of Europe for Reckitt Benckiser Plc.

“Hands came with a clear statement of intent to do things differently,” said Mark Mulligan, a music industry analyst at Forrester Research Inc. in London. “Hands and Terra Firma’s principles are very sound and he made some very shrewd moves, but at the same time he reacted just as strongly on what he saw as excesses.”

‘EMI’s Heritage’

Terra Firma in November offered to inject 1 billion pounds into EMI in return for a similar cut in the music company’s 2.5 billion-pound debt held by Citigroup, people with knowledge of the talks said then. Citigroup spurned the offer, saying it would have forced the bank to write off debt without getting equity in EMI.

“My hope is that EMI either gains strength by being able to borrow what it needs or merge with another label,” said Lester, the manager who signed Arctic Monkeys. “The heritage of EMI is important to the music industry.”

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