The Private Equity Rebel at EMI

The private equity financier who has initiated a huge overhaul of music giant EMI is playing down concerns that artists like the Rolling Stones will leave the label, attributing reports of a musician backlash to "headlines created by the British press."

"No artist has made any statements," Guy Hands, the founder of the British private equity firm Terra Firm, told Portfolio.com in a rare interview today on the sidelines of the Wharton private equity and venture capital conference in Philadelphia.

"Some artists managers have chosen to speak out prior to finding out what changes will mean to them and their clients. But we haven't had those discussions yet. We will be having discussions about those changes over the next several months."

Hands' comments came at the end of a tumultuous week for EMI, home of Norah Jones, Coldplay, and the Beatles. Hands, whose firm acquired the label last year, announced on Tuesday plans to cut as many as 2,000 of EMI's 5,500 jobs amid slumping music sales.

But it is Hands' approach to talent management that is feeding talk of an artists' revolt. Among other statements, Hands has promised to shed recording artists who are not "working hard enough," and reduce advances by replacing them with royalties on sales.

Earlier this week, the manager of British pop singer Robbie Williams told a British newspaper that Hands was behaving like a "plantation owner," and that his singer was going on strike.

On Thursday, rival Universal Music Group announced a one-album deal to produce the Rolling Stones' next album, prompting speculation the super group would bolt EMI when its contract expires in March.

In the interview today, Hands said he hoped the Stones would stay, but added that there are limits on the amount EMI will pay to keep them.

"We very much hope we keep the Stones, but we will offer a reasonable contract and then they will need to determine if it's in their best interest and make a decision like everyone else."

Hands predicted the owners of other labels will eventually follow the restructuring techniques employed by Terra Firma. He maintains that despite this week's layoffs, "within the company, the major response has been, 'I wish somebody had done this years ago.

"The strong will be now be able to go forward knowing we run a sustainable business without fear of further cuts," he said. "The whole industry needed to change for some time and needed somebody to put their head above the parapet and go first."

"Change is always unsettling and it will take some time to get used to," he said. "Change is positive."

The actual restructuring will be done over the next six months, he said. But "the change in the relationship with the consumer is going to take some time."

"The consumer needs to be persuaded free music is not a victimless crime," he said. "Teenagers are reasonable people like everybody else. They just need to feel they're not being ripped off or bullied and that they are getting the music for a reasonable price."

In his speech at the private equity conference, Hands compared his restructuring of EMI to the restructuring of pharmaceutical companies in previous decades. Pharmaceuticals, he noted, used to be run by scientists.

"Private equity got involved and said the scientists should still be involved, but that's research and development," he said. "The equivalent in the music business is A&R. The business skills are the same."

Most of Hands' address, however, focused on the market conditions and their impact on private equity.

His assessment for the future was considerably more pessimistic than his view on EMI.

Hands predicted that private equity would "take a long time to return to the heady days of 2003-June 2007.," and he outlined a wide array of gloomy variables looming on the horizon. More than $1.3 trillion of leverage buyout funding needs to be refinanced over the next three years, he noted, which will ensure that even when the capital markets become more liquid "lending is going to remain sparse."

"My view is that recessions in the United States and U.K. are inevitable, even as they may be delayed by interest rate cuts and other measures," he said.

Adam Piore