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What happens when leveraged buyout transactions go wrong?

Guy Fraser-Sampson on how EMI and Terra Firma got caught in the mega-buyout bubble

Wednesday, 9 June, 2010

What happens when leveraged buyout transactions go wrong?  According to Guy Fraser-Sampson, private equity expert at Cass Business School, Terra Firma’s takeover of EMI is a classic example of this.

There are three drivers of leveraged buyout returns, and in the case of EMI, says Guy FraserSampson: Earnings were hit by what was happening in the marketplace such as downloads and privacy, the multiples of these earnings were much lower than when the company was taken over in 2007, and the problem of debt in 2006-2007 which inflated the prices at which some of these buyouts got done.

In addition to this combination of problems, Terra Firma invested up to 30% of their funds in this deal, which means that they bet their firm on one transaction.  There is also a huge deficit in EMI’s pension fund between £20 million and £200 million and it is unclear as to whether this has been taken into account in the funding calculations.  Fraser-Sampson adds that although no one predicted the credit crisis, private equity was heading for a mega-buyout bubble: There was a huge amount of capital piling into the market place, and high amounts of capital are the enemy of returns.

The Cass Talks interviews are an opportunity to hear Cass faculty give their perspective on current business and finance news stories, global issues affecting the business world and new research coming out of the School.

Guy Fraser-Sampson is a private equity expert at Cass Business School.  Listen, watch and download Guy Fraser-Sampson’s Cass Talks and see other Cass academics share their opinions at

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