Guy Hands is no shrinking violet, despite his predilection for lavender ties. Defying the rules of private equity investing, the founder and CEO of London-based Terra Firma Capital Partners is unabashedly defending his much-maligned acquisition of troubled music company EMI Group.
On January 15 the bespectacled, blue-suited, slightly rumpled-looking 48-year-old — no wannabe gangsta, he — strode onto the stage at the Odeon cinema on Kensington High Street in London to announce a massive restructuring of the revered British music label. Gone, he declared, were the days when EMI executives could spend £40,000 on candles and £400,000 on fruit and flowers; gone too were nearly 2,000 staff jobs and an as-yet-incalculable number of acts. (EMI has been carrying some 14,400 artists on its books, only 3 percent of whom make any money for the label.)
Reactions across the music industry were swift and scathing. But Hands didn’t make his name and fortune buying down-and-dirty assets — pubs, gas stations and movie theaters — to wilt in the face of hostility.
“The music industry has some surprising similarities to politics,” he says. “If you question anything or criticize the way things have been done in the past, your critics will immediately voice their opposition in the public domain. Conversations I thought were private weren’t, which, to be honest, came as a surprise.”
No one disputes that EMI was foundering: The company, although profitable last year, has been losing money in its new-music division since 2000.
But Hands must do more than simply restore fiscal discipline. Thanks to the digital-download revolution, the industry itself is in crisis — sales are off 38 percent since 2000, and margins have been declining for seven years. Also, Terra Firma took on a pile of debt, easy enough to do when credit was cheap, to pay what now looks to be a bloated price of £3.2 billion ($6.4 billion).
Hands has to find a way to reassure EMI’s already jittery top artists that they won’t be neglected despite the radical cuts being made in staffing and distribution. The task will be tough, given low morale and high attrition: The bestselling band Radiohead walked away shortly after Hands’s arrival and signed with independent label XL Recordings. Robbie Williams and Coldplay, two of EMI’s other star acts, have expressed doubts about the restructuring. In mid-January, EMI Music’s chairman and CEO for the U.K. and Ireland, Tony Wadsworth, who was popular with many leading artists at the label, left.
“There is a culture clash evident at EMI,” says Mark Mulligan, a music industry analyst at Jupiter Research in London. “The acquisition will not be successful if one party forces its will on the other. EMI can’t be treated as just another company in Terra Firma’s portfolio; the firm needs to value the talent at EMI for this to work.”
Hands himself seems defiantly optimistic that the acquisition will succeed, not least because the company’s highly profitable publishing division, which licenses music rights for use in advertising and film, has never suffered the excesses of the recording division. Hands is keen to build on the success of the publishing business by making acquisitions (EMI is bidding for rival Chrysalis Group), even as he and his team try to find new ways to restore the luster — and stanch the losses — of EMI’s new-music releases. Most recently, the company has begun to use corporate sponsors to help defray the costs of producing and distributing music, signing sponsorship deals with Victoria’s Secret and Nordstrom for the right to co-brand EMI acts such as the Spice Girls and Joss Stone.
But corporate sponsorship alone won’t improve recorded-music margins, and Hands knows he’s going to have to radically redesign the business model in full public view.
He and his team plan to start culling unprofitable acts, and they are searching for ways to give consumers new outlets for accessing recorded music (such as packaging songs with cell phones) and have begun reissuing top-selling hits in new formats, as compilations. Even if they succeed, the transformation won’t be quick and easy. Hands anticipates that the whole project may take as long as six to ten years. Meantime, he’s going to have to figure out how to retain existing talent and boost margins.
“The recorded-music industry is notoriously difficult to manage,” Hands admits, “but somehow we have to close our ears to the noise and concentrate on the basics of running the business properly.”
