TERRA FIRMA ON SHAKY GROUND WITH EMI

Terra Firma is already trying to trim its equity stake in EMI amid a major strategic review of the music company’s business that could result in big changes, including a possible sale of its physical distribution business, The Post has learned.

EMI insiders and financial sources confirmed that Terra Firma has met with dozens of private-equity firms, hedge funds and other institutions in a bid to recoup some of the $1.5 billion in equity it poured into EMI as part of its $4.7 billion acquisition.

Terra Firma CEO Guy Hands already has gone back at least twice to the limited partners who participated in the original financing, asking for additional equity, according to one source who has met with the firm.

Offering partners an opportunity to invest in a deal on their own isn’t unusual. But sources said that taking such a step just three months after closing the EMI deal and going outside of its co-investor base suggests that Hands is already disillusioned with his purchase.

“If they thought the deal they made was good, they wouldn’t be diluting their stake by trying to bring other investors in,” said one person close to EMI. “They’re trying to find others to buy in so they can offload some of the risk.”

One source close to Terra Firma conceded the firm’s offer for EMI was predicated on various financial assumptions based on limited due diligence.

In addition to diluting its equity position, sources said Terra Firma is also looking at a number of cash-saving initiatives, with company insiders confirming that selling off its physical distribution operation and farming out packing and shipping functions hasn’t been ruled out.

Selling EMI’s distribution operations – a strategy that other record companies have mulled since 2000 – would generate quick cost savings because of the cuts in staff, overhead and real estate. It would also fit in with EMI’s pruning of its real estate and distribution holdings in recent years.

Other cost-saving options under review include overall job cuts and spending curbs, sources said.

Hands, who has a history of selling bonds backed by the cash flow of various assets, could use this strategy as a way to quickly raise cash as well.

While Terra Firma has yet to make its first debt payment as part of the EMI purchase, sources said the cost-saving measures under review are aimed at prettying up the balance sheet for when Terra Firma has to show the company’s numbers to its lender banks.

A spokesman for Terra Firma declined to comment.