EMI trial: The background

The sensational trial due to open in New York today will pit two of Britain's most high-profile financiers against each other. What's the court case about? Guy Hands, the private equity tycoon who owns struggling record company EMI, is accusing one of Citigroup's leading investment bankers, David Wormsley, of tricking him into buying the 113-year-old music company in 2007. Hands claims Wormsley pretended another bidder, Cerberus Capital, was in the frame to buy EMI as part of a ruse to drive up the price. Citigroup says the allegation is baseless. Hands's private equity firm Terra Firma bought EMI at the height of the credit boom, shelling out £4.2bn for the music company – his largest and most disastrous investment. Hands has admitted he overpaid. Terra Firma then loaded EMI with nearly £3bn of debt and has come dangerously close to breaching banking covenants. Citigroup, which owns all of EMI's loans, has been locked in restructuring talks with the financier for more than a year. Who are the main protagonists in this courtroom drama? Hands is a flamboyant British financier, a British tax exile and a former Goldman Sachs banker, educated at Oxford, and William Hague's best man. Wormsley is a star banker at Citigroup in London, nicknamed "the Worm" for his clever takeover tactics. The pair used to be good friends who went shooting and to the opera together. For more than a decade, Wormsley advised on the corporate deals struck by Hands's Terra Firma, sometimes for nothing. But the EMI deal has made bitter enemies of the pair. Talks between their lawyers broke down at the weekend and today the two men will face off in a federal courtroom in Manhattan. So what's going to happen at the trial? The trial will cast a spotlight on the deal-making frenzy at the peak of the credit boom, a rare opportunity to look behind the scenes. Citigroup reaped millions in fees, as it acted as adviser to EMI and provider of debt finance to Terra Firma at the same time. Hands's legal move is seen as a last throw of the dice to gain the upper hand in the long-running negotiations with Citigroup to restructure EMI's debts. The financier wants the American bank to forgive £1bn of borrowings if he puts in the same amount of equity, but Citigroup has refused. The Americans prefer a debt-for-equity swap to enable the bank to acquire a shareholding in EMI in return for writing off debt. What do EMI's artists think? Some, including Coldplay , Arctic Monkeys , Robbie Williams and Lily Allen have remained loyal to EMI – although not uncritical, in Allen's case. But other big acts including Sir Paul McCartney , Radiohead and the Rolling Stones have defected since the Hands takeover. McCartney has described EMI under Hands as boring. Allen did not mince her words , saying in an interview with The Word magazine: "I hate Terra Firma. They're wankers and they don't know what they are doing. They will fail." Some musicians have criticised Terra Firma's "bean-counter approach", while Hands prides himself on cutting wasteful spending and putting an end to extravagances such as "flowers and candles" – code for favours given to music stars. So what went wrong at EMI? CD sales have plummeted. Hands has managed to slash costs and revenues have picked up but EMI is still at risk of defaulting on its debt. If it does or if the court case goes against Hands, Citigroup could seize control of the company and put it up for sale again. Would anyone be interested? EMI is still a highly coveted business, especially its profitable music publishing arm. Rival Warner Music has long had its eyes on EMI, which was founded as the Gramophone Company in 1897.