Litigation with Citigroup has just kicked off in New York concerning the purchase of EMI. Terra Firma and Guy Hands allege they were duped into over-paying for EMI by Citigroup, who pretended there was another buyer in the race in order to keep the price up. Now it seems a settlement is being discussed. Can a deal be done that meets the underlying needs of both parties?
Under the proposed terms Citigroup would apparently be asked to slash US$2 billion off EMI’s debt in return for the action being dropped and Citigroup taking a minority interest in the company. This would avoid Hands and Terra Firma having to raise more cash to meet debt covenants that it can ill afford (a further hefty chunk being due in March, 2011).

Though the deal terms may be all about debt repayments and cash-injections, for both parties this is really a deal about preserving reputation, which is a “reassurance need”. Both the value of the company and the loan used to buy it have largely been written off in each party’s books, so this deal is not really about the money. Guy Hands does not want to look as though he made a massive and ill-informed judgement in acquiring EMI at the price that he did, and Citigroup certainly does not want to look like it mis-represented the deal. Nor does it want to look like it caved in to a settlement just because Hands launched a law a suit – that would send a terrible signal to any disgruntled purchaser of an asset which had been previously sold to him by Citigroup.
These deep-seated needs may not be explicitly talked about in the deal, but they will drive it. Only if both sides feel that a deal enhances their reputation will a deal get done. If it doesn’t then the case may continue as each party seeks vindication in court instead….