And yes, it’s slightly jarring to have a giant Wall Street bank holding the keys to one of the world’s biggest music companies, which also happens to be the home of the Beatles.

But that’s going to be a temporary situation: The only question is, who will end up buying the company from EMI, and whether they take the whole thing or split it into parts.

Warner Music Group has been trying to link up with EMI for years, but Universal Music Group and Sony, the two other big music labels, could conceivably bid on at least a portion of EMI. So could KKR and Bertelsmann’s BMG.

Meanwhile if you’re a buyer–or non-buyer–of EMI’s music, nothing’s going to change in the near term. The deals EMI has with Apple, Amazon and the remaining physical music retailers will remain in place. I’m curious to find out if EMI and Spotify inked their U.S. distribution deal before Citigroup took back the keys; I’ll update if I get an answer.

And the company that does own EMI, private equity shop Terra Firma, is trying to keep it that way for a little longer. Terra Firma is appealing a November court ruling it lost against Citigroup, which lent it the money for a terribly conceived $7 billion deal to buy EMI, way back  in 2007.

But barring big legal reversal, it’s hard to see how the bank won’t end up with the keys to the company sooner than later. The U.K. Observer thinks it could happen “within weeks.”

If and when it does, I’m not sure it will make that much difference to the label’s employees, its acts or its customers, who have been dealing with a company in a state of confused stasis for several years.

And the label is also unlikely to stay in Citi’s clutches for long–the most obvious move would be to break the company up and sell the pieces, with Warner Music the logical buyer for EMI’s recorded music group.

Guy Hands’s private equity group has rounded up another $150 million from investors, which will allow it to avoid a looming default on debt held by Citigroup (C), the Wall Street Journal reports:

Mr. Hands’ success in tapping his investors hands him a victory in the latest round of his epic battle with Citi, which lent him the money to fund the leveraged buyout in 2007. With syndication markets closed as a result of the financial crisis, Citigroup was stuck holding more than £3 billion of EMI debt. The two sides have been unable to agree to a restructuring of the business, setting up a high stakes game of chicken.

The cash buys Mr. Hands nearly a year, to the end of next March, to execute on a turnaround plan for EMI, which has been buffeted by a shift in demand for music away from CD sales and the crippling debt the buyout saddled it with. Amid the problems, it has seen a number of big name artists flee the label, including Radiohead and Paul McCartney.

Bigger question: Does it really matter if one of the big music labels is owned by a private equity group instead of a bank? Maybe not. There’s still a good chance that EMI will end up getting broken into parts and sold off to rivals like Sony (SNE) and Warner Music Group (WMG).

My colleagues are lapping the last one up, with good reason: The OK Go are fun to write about, because they make cool videos and because lead singer Damian Kulash is very quotable when he talks about the state of the music business and his band’s relationship with EMI.

For instance, here’s a stinging part of his exit interview with New York Magazine today:

Q: What other problems were you having with EMI?
A: ?The issue is that they just don’t have any money. The reason a band signs with a label is because they can provide start-up capital, and their business model has sort of collapsed. There was lots of little bones of contention, like when there were chances for us to promote things and they just didn’t have the money to do so. It was a lot easier to be generating the budget ourselves or through corporate partners.

EMI has issued a boilerplate quote wishing the band success–it’s going to create its own label–and leaving it at that.

And EMI does have real money problems. In part because everyone who sells music right now has money problems and in part because private equity fund Terra Firma paid too much and took on too much debt when it bought the label three years ago.

But here’s the thing. If EMI’s executives allowed themselves to speak candidly, they would likely point out that while the OK Go made great videos, it didn’t seem to make music that many people wanted to buy.

Soundscan says the band has sold all of 500,000 albums in the U.S., both in physical and digital form, in its three-album tenure at EMI. That’s 488,608, to be exact. Plus another 25,000 single tracks.

That’s not awful. But it’s not the kind of sales that would inspire a big label to spend big money promoting an act. Even when the industry’s business model was still intact.

But the band really does make nice videos that people like watching on Google’s (GOOG) YouTube. If it can figure out how to turn these into dollars, it’s all set.

OK Go–This Too Shall Pass from OK Go on Vimeo.

Leoni-Sceti came to the company in July 2008, a move that raised plenty of eyebrows as he had zero experience in the music business. His background was marketing packaged goods like Woolite and French’s Mustard.

But in retrospect it doesn’t really matter who Terra Firma brought in to run the company; the investment group’s big mistake was paying too much for EMI, using too much debt, in 2007.

At this point, the real question for EMI isn’t who runs it, but who owns it. There’s a decent chance that Terra Firma will breach a banking covenant in coming months and that control of EMI will go to Citigroup (C), which owns most of the label’s debt.

The conventional wisdom is that part or all of  EMI will end up in the hands of longtime rival Warner Music Group (WMG) sooner or later.

Release:

CHARLES ALLEN BECOMES EXECUTIVE CHAIRMAN OF EMI MUSIC LONDON, 10 MARCH 2010 — EMI Music announces the appointment of Charles Allen as its Executive Chairman.

Charles has been non-executive Chairman of EMI Music since January 2009, chairing its Board and supporting the transformation of the business. Elio Leoni-Sceti, EMI Music’s Chief Executive, who has successfully led EMI Music through the first phase of its operational turnaround, will be leaving the company on March 31st 2010.

Over the past two and a half years, EMI Music has become a stronger and growing company, with a talented senior team, significant creative success and a more rigorous approach to marketing and operations. This has resulted in increased sales, improved market share and industry-leading EBITDA margins.

Charles said: “Elio has done a great job. I have thoroughly enjoyed working with him; he is a very talented executive and we all wish him well in the future. Our goals for EMI Music remain the same. I will support and guide the group’s strong team, keep EMI’s focus on creativity and superb A&R, and deliver a digital platform. This is a great business – our task is to ensure it has a great future.”

Elio added: “EMI is a wonderful business with a great team and new creative and operational momentum. My job here is now done and it is time for me to move on. It has been a pleasure to work with Charles and so many other talented and committed people. I look forward to seeing the company go on to further success in the future.”

EMI, the record label that owns the property, has put out a release that sort of denies reports that it had put the building on the market. The full text is at the bottom of this post, but the upshot is that:

• EMI rejected a $45 million offer for the studio last fall
• EMI would like someone to invest in the property and keep it up and running, but that
• EMI “believe[s] that Abbey Road should remain in EMI’s ownership.”

The issue here is that EMI’s plans for Abbey Road may not be relevant.

The label’s owner, private equity shop Terra Firma, may end up losing control of the company to lender Citigroup (C). If that happens, it doesn’t really matter what EMI’s current management wants to do.

Here’s the full statement:

EMI welcomes the reported acceleration of English Heritage’s plans to list Abbey Road and supports such a listing as an appropriate way of protecting our world famous music heritage site. In response to recent press speculation, EMI confirms that it is holding preliminary discussions for the revitalisation of Abbey Road with interested and appropriate third parties.

When Terra Firma acquired EMI in 2007, it made the preservation of Abbey Road a priority. Abbey Road studios had, for a number of years, been losing money and we have developed plans to revitalise the studios. These plans would involve a substantial injection of new capital.

Since November 2009, EMI has held discussions with a number of parties with a view to them financing these plans and maintaining this unique venue. At all times, these plans have focussed on providing access to artists and, where possible members of the public.

In mid-2009, we did receive an offer to buy Abbey Road for in excess of £30 million but this was rejected since we believe that Abbey Road should remain in EMI’s ownership.?

And it turns out that people still care about John, Paul, et al.

EMI says it has sold a staggering 10 million copies of the band’s remastered albums since September. The total includes the giant box sets of the band’s work (if you bought the stereo set, that accounted for 14 albums in one purchase; if you went with the mono discs, that counted for 11), as well as downloads for the sort-of successful Beatles Rock Band game.

And, of course, nada from iTunes. Sidebar: If and when the band finally starts selling its music on Apple’s (AAPL) digital storefront, will there be anyone left to buy it?

But back to EMI, which has much more unpleasant news to deal with, namely that owner Terra Firma seems to be at the end of its rope. The private equity firm is now suing Citibank (C), which lent it the billions it needed to buy the music company in 2007, for fraud.

And Terra Firma is reportedly looking for investors to lend it another $1.6 billion to keep the company afloat, in large part because it fears it will default on the money it has already borrowed from Citi.

The conventional wisdom, meanwhile, is that all of this is simply a precursor to an eventual combination between EMI and Warner Music Group (WMG)–a deal the two companies have been trying to pull off for close to a decade.

Terra Firma’s complaint, via the New York Times’s Dealbook, makes for fascinating reading, in large part because of the cognitive dissonance created by Terra Firma’s description of itself.

The company describes itself as a clueless investor duped by Citigroup into buying the music company in an auction with no other bidders and as a savvy manager that has turned around the ailing music company.

Can both descriptions be true?

Terra Firma’s Lawsuit Against Citi Over EMI

(Also, some free fact-checking for Terra Firma’s attorneys: The iTunes Store launched in 2003, not 2005.)

The company’s revenue climbed 7.4 percent in the 12 months ending March 31, the company disclosed (via PaidContent).

The rise is due to increases in both the sale of recorded music and publishing revenue; increases in the former are particularly rare these days. And these numbers ought to bump again in the coming year given that they’ll include dollars/pounds generated by the re-release of the Beatles albums.

Alas, since EMI owner Terra Firma is deep in the midst of negotiations with Citigroup (C), which lent it billions to buy the company, it’s not handing out any other details about the company’s performance, so hard to tell what’s really going on there.

Still, we do know that music has been in decline for a decade, and EMI’s bump up is the first, no matter how modest, in many moons (click on table below to enlarge).

That’s the obvious question in light of news that both Terra Firma, the private equity group that bought EMI in 2007, and Citigroup, which funded most of the transaction, have written down most of their investments in the music company.

This isn’t a surprise–the move has been a long time coming–but it does open the door for Warner, which restructured its debt with an eye toward making such a deal earlier this year.

Pali Research’s Rich Greenfield thinks that Citi (C) will push to break up EMI and sell Warner (WMG) the record music group, which tends to lose money, and keep the music publishing business, which has been a reliable money maker, even during the industry’s 10-year freefall.

But at this point, I don’t know why Warner couldn’t try to swallow the whole thing. In the past, that deal would have been scuttled due to antitrust issues (and in fact, it was), but the music industry is a different beast right now–a sick beast–and I think regulators would be a lot more forgiving this time around.

[Image credit: beggs]

Merrill’s hire in April 2008 was supposed to represent EMI’s willingness to break free from its old CD-based businesses, and a breath of fresh air. Merrill, who had formerly been Google’s (GOOG) CIO, cheerfully admitted that he had no background in the music business.

But it’s not clear what, if anything, Merrill was able to accomplish since he moved to EMI. On the other hand, it’d be hard to imagine any single executive being able to make much impact at EMI or any other label, given the industry’s accelerating decline.

Meanwhile, Guy Hands, the private equity executive whose Terra Firma shop bought EMI in 2007, has had to write off half the value of his investment, and that’s probably an optimistic valuation. And earlier this month Hands himself stepped down from his position as Terra Firma’s CEO.

Here’s the internal announcement from EMI CEO Elio Leoni-Sceti:

From: Internal Communication
Sent: Mon Mar 23 19:31:21 2009
Subject: ORGANISATION ANNOUNCEMENT – from Elio Leoni-Sceti

Dear all

With digital now comprising over 20 per cent of our revenues and growing fast, and with the progress we have made in integrating all of our digital operations fully into the business, we will no longer operate a standalone digital function.

Douglas Merrill has today stepped down from his roles as President of Digital and COO of EMI New Music and will be leaving the company.

I would like to thank Douglas for his contribution and to wish him well for the future.

Digital Marketing

I am delighted to announce that Cory Ondrejka is appointed to the newly-created position of Executive Vice President, Digital Marketing, reporting initially to me and then to our new President of Marketing whose appointment we expect to announce shortly. We have been planning this promotion for Cory for some time now. In his new role he will help us deliver our goal of leveraging the power of digital across our business, particularly in the key areas of consumer understanding and analytics, content creation and digital marketing, in order to strengthen the relationship and interaction between our artists and their fans.

Cory is a highly talented executive with a passion for music and a complementary, technology-based skillset. Since he joined us from Second Life last year he has helped us create a new approach to digital that will be unique to the music industry including establishing a world-class engineering team on the West coast and instituting modern, agile software development practices and tools that are the foundations to help us transform our approach to analytics and marketing.

He will be making further announcements about his Digital Marketing team in due course.

New Music

Nick Gatfield and Billy Mann, our Presidents of A&R Labels for North America/the UK and International respectively, will join the EMI Music Executive Committee and, as members of the New Music Operating Board, will continue to support me directly in my role as President of EMI New Music.

Under their leadership, EMI is building very strong creative momentum. In the last four weeks alone their A&R Labels teams around the world have signed 14 new artists, three in the US, four in the UK and seven in the rest of the world.

Digital Supply Chain/IT

Peter Baker, VP, Digital Software Engineering, and Dan Levine, VP, Digital Product Development, who have been leading the work on our Digital Supply Chain, now report to Ronn Werre, President, EMI Music Services. Ronn will be making the Digital Supply Chain a top priority so that we can best serve our artists and our customers.

Richard Piercy, Acting Chief Information Officer, now reports to Chris Kennedy, our Chief Financial Officer. Richard will continue to oversee our global IT system which is an important strategic enabler and one that is strongly linked to our management and financial reporting requirements. Chris will ensure that IT supports the company’s strategic ambitions effectively and efficiently.

Meanwhile Mark Piibe, in his role as SVP of Digital Business Development, will report to Ronn Werre whose Music Services team now leads all deals and relationships with our digital and physical retail partners.

Building our new music repertoire and embedding digital into everything we do are key to our future success. With our growing creative momentum under strong A&R leadership and the final integration of all remaining digital functions into the business, we have a solid platform for enhanced performance in this coming year.

Thank you for your continued efforts.

All the best
Elio

He’s probably being too conservative.

At least if you use Warner Music Group (WMG) as a comp. Edgar Bronfman Jr.’s music company is (very) roughly the size of Hands’s music company and was forever slated to buy, sell to, or merge with EMI. (In May 2006, EMI was willing to pay $26 a share in cash for Warner, but Bronfman rejected the deal; a year later, EMI rejected a Warner offer.)

Take a look: WMG, currently trading at $1.86 a share, is down 86 percent since Terra Firma bought EMI in August 2007. At what point will Hands have to fess up and take another write-down? (Click chart to enlarge).

Here’s an EMI employee with no complaints about the music business–Norah Jones, whose 2002 debut album was really EMI’s last super-huge success. Those days are gone, but she’s managed to hang on to her money–or at least enough to pay $5 million for a Brooklyn townhouse a couple months ago. Check out this excellent duet with Dolly Parton (yup, that Dolly Parton).

Elio Leoni-Sceti, who heads up the EMI Music unit, explained the overhaul during a staff meeting in London today, and he’ll be embarking on a barnstorming tour to give the same speech at EMI outposts around the world.

But the more important message EMI delivered today was to the company’s investors, who have lent it some $5.8 billion: Don’t worry! We’ve got plenty of cash.

This is good to know, given that EMI has already disclosed that it racked up paper losses of more than $1 billion in 12 months. And there is persistent chatter that the company is strapped for cash and is having a difficult time making debt payments.

Not true, says Leoni-Sceti. “EMI is absolutely not bankrupt, far from it. EMI has never been in such a financially sound situation,” he told the FT. “Terra Firma is a solid financial owner and is committed to this company…and committed to putting in more equity if it is required.” [Emphasis added].

That last part is important, since it suggests that debt service could be an issue for the company–one that could force Terra Firma to inject more cash to keep it afloat. But the company also released a limited set of financials for the recorded music unit (that’s the really troubled part of EMI–its music publishing business is in decent shape), which paint a much rosier picture.

All sums converted from British pounds, for the six-month period ending Sept. 30:

• Revenues: $758 million, flat year-over-year
• Operating cash flow: $314 million
• EBITDA: $93 million

And while physical sales were down three percent (that’s not bad, considering the rest of the industry), digital revenues via outlets like Apple’s (AAPL) iTunes were up 37 percent, the company said.

Even people who don’t know anything about the music business know what’s wrong with music business: No one wants to buy music anymore.

Right?

Well, sort of.

While people are buying a lot less music than they used to, they’re still spending a couple billion dollars a year on iTunes from Apple (AAPL) and the like, and many billions more on actual, hold-in-your-hand compact discs.

So in theory, at least, a well-run company should be able to do something with a market that big.

That company, at least for the last several years, has not been EMI Music Group. That’s not just in MediaMemo’s judgment, by the way. That’s the judgment of EMI Music’s owners: The United Kingdom’s Terra Firma private equity group, which bought the company for some $5 billion in the summer of 2007.

Terra Firma’s assessment of the company, delivered via a 101-page annual report, makes for amazing reading. We’ve embedded it below (you’ll need to click on “Full Screen” to make it legible).

But in case you’re time-pressed here’s the executive summary:

• EMI has a relatively valuable publishing company, which administers the copyrights to the underlying compositions to songs. That unit makes money.
• EMI also owns a valuable catalog of song recordings. That unit could make money, but it’s all being eaten up by the group that burns money by signing and recording artists who make new recordings that no one wants to buy.
• Terra Firma knew EMI was badly run when it bought it, but it didn’t really know how badly run it was until it owned it. It figured, for instance, that there was a lot of waste at the company. But it had no idea the U.K. division was spending $1.1 million a year on a London taxi service. And it had literally no idea how much money some of EMI’s executives were making, because EMI wouldn’t disclose that during due diligence.

This last part is crucial for EMI’s future because the people who funded the deal last year–Terra Firma’s investors, as well as Citigroup (C), which provided the debt financing–need to be convinced that the people who didn’t understand what they’d bought last year are the people who should be trusted to turn it around.

But that’s a question for later. For now, if you want to see how a music company managed to lose $1.17 billion in 12 months, this is the document for you:

EMI report – Get more Business Documents

[Image Credit: Lorelei]