LOS ANGELES (Reuters) – British private equity firm Terra Firma accused Citigroup Inc (C.N) of fraud and sued the bank for billions in damages in connection with Terra Firma’s purchase of music business EMI Group in 2007, court documents filed on Friday in New York showed.
Terra Firma accuses Citigroup of inflating the price it paid for EMI by failing to reveal that the only other bidder, Cerberus Capital Management, had withdrawn hours before an auction for EMI closed, Terra Firma’s attorney Jonathan Sherman told Reuters.
Instead, the Citi executive working on the auction told Terra Firma shortly before the bidding deadline that it had to top a purported Cerberus bid to win EMI, Sherman said.
Had Terra Firma known it was the only bidder left, it would not have bought EMI, he said.
“The damages are some amount of equity, which we think reaches into the billions of dollars, reflecting equity that we wouldn’t have parted with but for the fraud that Citigroup committed,” Sherman, of Boies, Schiller & Flexner, said.
Private equity firms have struggled to keep their porfolio companies healthy amid the financial crisis, and some private equity-owned companies have either filed for bankruptcy or are struggling to meet debt covenants.
Many buyout firms went deep into debt to acquire companies during the buyout boom of 2005-7 and are now paying the price, while banks are unwilling to take further pain on loans they made in better times.
Terra Firma bought EMI at the height of the buyout boom in May 2007 in a 4 billion-pound ($6.51 billion) deal, closing the deal with a 2.5 billion pound loan from Citi and 1.5 billion in equity.
Citi served as adviser, lender and broker to EMI and sole financier to Terra Firma, which contends it also overpaid for its debt as a result of the fraud, the lawsuit said.
In a statement, Citigroup described the lawsuit as “without merit” and said the bank would “defend ourselves vigorously.”
The complaint also alleges that Citigroup undermined Terra Firma’s ability to manage EMI by fueling speculation about the music company’s financial health in an analyst note in October and by refusing to restructure its loans.
“Citi is trying to generate the conditions to make a covenant breach possible”, possibly as part of a plan to take control of the company and sell it to Warner Music Group (WMG.N), Sherman said.
The lawsuit comes a couple of months after Terra Firma Capital Partners Chairman and Chief Investment Officer Guy Hands said EMI’s results were improving and that the firm was in “gentlemanly” talks with Citigroup over the debt, which is costing EMI 10 percent a year, or about 300 million pounds.
Citi is holding the debt package associated with the deal after an attempt to sell some on to secondary investors was thwarted by the credit crunch.
The ailing music group, whose artists include Coldplay and Robbie Williams, accounted for the vast majority of Terra Firma’s 1.37 billion euro ($1.96 billion) writedowns this year and Terra Firma was forced to inject extra capital into EMI twice in just six months.
LUCK AND TIMING
Hands, previously the chairman and chief executive officer of Terra Firma, relinquished day-to-day control of the firm in March amid investor ire over the EMI deal to concentrate on investments and building relations with investors.
He conceded in September that Terra Firma had overpaid for EMI, saying in a speech that luck and timing were a good part of investing.
“If the EMI auction started two weeks later, it wouldn’t have occurred,” Hands said at the time. “We wouldn’t have bought it. We’d have 90 percent of our funds still to invest and we’d look like geniuses,” he said.
Terra Firma has invested about $20 billion of equity capital in businesses around the world.
The lawsuit is Terra Firma Investments Ltd vs. Citigroup Inc, Case No. 603737/2009, Supreme Court of the State of New York.
(1 pound = $1.62)
By Gina Keating
(Additional reporting by Franklin Paul, Dan Wilchins and Megan Davies; Editing by Bill Tarrant)