Citibank, the US multinational bank that recently announced record profits, after having taken a hefty amount of support from the US Government after the banking crisis of 2007, is again in the news. Terra Firma, a private equity group has alleged that the bank convinced them to buy troubled music label EMI at a vastly inflated price of £4.2 billion, or $6.7 billion, by providing misleading information. The group claims that Citibank made multiple commissions and profits from the deal, leaving Terra Firma holding an asset far less in value than what it paid for.
Guy Hands, the investor leading the group has staked his reputation that the Bank would not want the details of its underhanded deal-making exposed to the public glare, since the US Government holds a substantial stake in the bank at present, and is yet to pay off its debts. Citi’s lead financial adviser reportedly asked Terra Firma to pay more for the music label by claiming that Cerberus Capital Management, another bidder, was still in the race long after they had actually pulled the plug. Citi denies the claim, arguing the amount was already authorized by the Terra Firma board.
However, Hands has supplied several confidential emails from Citi executives congratulating themselves on the fees they got from the deal, as well as the 3 billion pound loan it made to the company, in the initial filing. Top management at Citi may be worried about any more skeletons that Terra Firma might let out of the closet, and a loss of the suit would mean hefty damages, as well as a blow to an already shaky reputation.
Citi’s primary option appears to be a quiet resettlement or renegotiation of the loan terms given to Terra Firma. Based on industry benchmarks, EMI is today worth only 2 billion pounds, a third less than the Citibank loan. Citi’s loosening of terms will allow Terra Firma time to get EMI back on its feet again, and reduce the cash flow required to keep the label running.However, the drawbacks exist even if Citibank should settle out of court. Other disgruntled clients may follow the same path, and cost Citi millions in legal fees. Even if Citibank wins the case, the Terra Firma investors might agree to prop up EMI, thus making it an embarrassment for Citibank.
Investment banks in the boom era have been accused of making several such deals, a move which has boomeranged on them now that they are at the mercy of the Government and its scrutiny. With the Government an investor in several of them, more murky details might come out into the open in the coming days.