There are some unpleasant sounds issuing from the Thames-side haven whence I write this week's column. One is the sound of a fat lady clearing her throat, and she's preparing to sing [at which point, of course, the show's all over, folks].
I'm thinking of the difficulties surrounding the troubled music publisher, EMI. EMI is an iconic name in the entertainment and music industries. In 2007 it was bought by Terra Firma, a UK private-equity firm led by well-know businessman, Guy Hands.
I'm a fan of Hands. He's sharp, gets things done, and has a perspective on what's important in life. It's very easy to dismiss folk in the world of private equity as number-crunchers, or people who do evil and don't care about building a business, only about selling it. Hands is much more than that. He is a thoughtful man and one who loves business. He has, of course, bought and sold companies at a profit, and there's nothing wrong with that.
But now the fat lady is rustling her music score and stepping up to the microphone. Of course, with the perfect vision of 20.20 hindsight, it's easy to say that Hands simply paid too much [about £1 billion (Dh5.7bn) too much – roughly the size of the recent write-down in good will]. This is the discrepancy that's basically the cause of writs flying between Citigroup and Terra Firma. The argument revolves around the level of disclosure in the deal – done just before the credit crunch began to unfold. More than that, it would be imprudent to say right now.
The rationale for the deal seemed respectable enough at the time. Hands has long held the view that it was better to do a smaller number of properly researched deals than have a widely diversified portfolio that wasn't properly supported by the managers. He's on record as saying that private equity tend to have to write off between 10 and 20 per cent of their investments. Having a smaller portfolio of seven or eight companies and seeing one fail, by that reasoning, was not much more of a risk.
But the price tag for EMI was some £4bn. That's an investment which makes me think of what some people have been saying about banks. This is an investment which is just too big to fail. Some of us saw the storm clouds gathering over the EMI deal. So it was with great interest that I read the note that accompanied Hands's anticipated Christmas gift of a book [he typically selects a book which he feels is relevant to the financial world and has a greeting in the form of a commentary printed].
Last Christmas, Hands chose the economist Roger Bootle's book, The Trouble With The Markets.
His note speaks for itself. After some vocal criticism of bankers' pay [Hands pays himself plenty – but he does deals and takes risk with his own money – unlike most bankers who bet their employers' – or taxpayers' – money]. "Over the course of 2009, we at Terra Firma have been focused on our current portfolio and have used our extensive operational resources to drive performance despite these economic challenges," wrote Hands.
"During the year, this hard work has clearly yielded good operating performance in all our portfolio businesses, especially at EMI Music where the 2009 fiscal year ebitda was more than three times that of the previous year with top line growth coming through as well... and 2010 should be even better." Let's hope so.
Capital and talent fight
If I bang on about certain topics, it's because they're important. So forgive me for returning to the topic of capital and talent flight. Last year, Guy Hands was one of the more high-profile businessmen to leave the UK and become a tax exile in Guernsey.
The new top rate of income tax in Britain is now 50 per cent for those earning more than £150,000 (Dh862,252) per annum. Hands has a net personal wealth estimated at some £200 million – any capital taxes on that will now not be falling into the grateful hands of the UK Exchequer. Apart from loss of revenue, the fact is Hands is a talented fellow. I shall stay put whoever wins the next election in Britain. But if Labour gets back in, there will be a exodus from the UK, I fear. The beneficiaries will be the locations with favourable tax treatments. Dubai, popular among Brits, is set for a second wave of love from over here.
- Martin Baker is journalist, author and commentator on international business affairs
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