EMI is apparently in a scramble for cash and working on a bonus scheme to persuade investors to inject an extra £120 million. This is to stave off a takeover by its bank, Citigroup. From a negotiating standpoint, however, the odds of raising the money are strongly in its favour.

The headlines surrounding EMI’s financial woes do not make particularly pretty reading:

- Terra Firma acquired EMI for £4.2 billion in 2007, saddling the company with more than £2.6 billion of debt. This was raised by Terra Firma’s advisors on the deal, Citigroup. EMI has now reported losses of £1.75 billion for last year, and Terra Firma has apparently written down the value of its investment by 90%.  Heritage assets such as Abbey Road studios have been put up for sale.

- As a result, a cash call has gone out to raise a further £120 million from investors so that Terra Firma does not breach the terms of its Citigroup loans in June, in which case EMI would fall into the hands of its bankers.

- Meanwhile recently appointed CEO Elio Leoni-Sceti has surprisingly and hastily been replaced by ex ITV head Charles Allen, an inveterate cost-cutter, and so far he has not managed to raise some £400 million from licensing its masters in the US to Sony or Universal.

- Terra Firma and Citigroup have also fallen out over the original transaction, with a lawsuit against Citigroup alleging that the bank was guilty of fraud in not informing Terra Firma that a rival bidder, Cerberus Capital Management, had withdrawn from the bidding, with the consequence that the purchase price was inflated.

As with most negotiations, it is the personal needs of the protagonists that will drive the deal. These are the emotional needs, often undeclared, that sit just below the surface of the debate, rather than organisational needs (such as “price” or “quantity”) which the parties say they are bargaining about. From the point of view of Guy Hands and Terra Firma, there is a sense that part of the original transaction to buy EMI may have been driven by a very human belonging need to be part of the alluring world of show-business. If so, that need may have been assuaged by viewing the creative idiosyncracies of the industry and its artists close up. There has been a feeling for some time that Rock ‘n’ Roll and Terra Firm are a little like oil and water. However, one driver that is likely to have survived the original deal is the achievement motivation of Hands and Terra Firma. Guy Hands has been an incredibly successful businessman, thriving on turnaround challenges at other companies. That desire is unlikely to have been diminished by the challenges he faces at EMI; so you might expect him to still be up for continuing with the EMI project.

From the point of view of investors, their needs are likely to be driven by a desire for reassurance, a need to know that everything is going to end up okay. That’s why highly leveraged transactions tend to have the kind of default clauses in favour of lenders with which EMI is now grappling. They will need to feel reassured that if they put more money in now, it is going to increase rather than diminish their chances of getting their original investment back. That is why Hands and Allen have for some weeks been preparing  a new, reassuring business plan for investors. One thing investors will be considering is their “BATNA” – their Best Alternative to a Negotiated Agreement. They will know that their BATNA is not very attractive, as it will involve EMI ending up in the clutches of its lenders. At that point the only realistic alternative would be a fire sale. Pundits estimate that the successful Publishing arm of EMI is only worth £1.2 billion, which does not bode very well for any valuation of the recorded music side of the business.  On the other hand, if more money is pumped in it is just possible that the business may turn around. EMI’s underlying operating performance is improving, with earnings before interest, tax, depreciation and amortisation rising to £298 million last year from £164 million the year before, cost-savings now taking effect, and new business models being encouraged. There are also signs that the Music Industry as a whole is beginning to win its fight against P2P piracy, which would benefit incumbents like EMI.

On this basis, the different but aligned needs of the two parties should ensure that the negotiation succeeds and Terra Firma ends up getting the cash it needs to keep EMI on solid ground.   One wild card though is any animosity caused by the Terra Firma/Citigroup litigation. This may be creating a “lose-lose” mentality in negotiation attitudes to the cash problem at Terra Firma and Citigroup. If that attitude takes hold, then rational deal-making becomes much harder to predict!