FINANCIAL TIMES MONDAY DECEMBER 31 2007

MEDIA

* 19

Companies I UK

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NEWS ANALYSIS

A vision statementfrom the TerraFirma chief has toinspire, writeJoshua Chaffinand AndrewEdgecliffe-Johnson

As a student at Oxford, GuyHands secured a backgroundrole in a Hollywood block-buster being filmed at hiscollege. Tired of waitingaround, he led his fellowextras out on a strike thatsucceeded in doubling theirpay.

The film, Heaven's Gate,went so far over budget thatit nearly bankrupted UnitedArtists and ended the erawhen directors, rather thanstudios, controlled budgets.

The impatient Mr Handswas only a footnote to thesaga, but a generation laterhe found himself weighingthe balance of powerbetween artists and mediacompanies from a differentperspective.

Weeks after completinghis £4bn buy-out of EM! inSeptember, the fabled buttroubled British music com-pany, the dealmaker faced aclassic talent businessdilemma.

Radiohead's contract wasup for renewal and TerraFirma, Mr Hands' privateequity group, had to decidewhether it was worth re-signing one of EMI's best-

known bands at a time whenthe record company was los-ing sales and desperate tocut costs.

He canvassed veteranmusic executives for adviceand they urged him to dowhatever it took to agreeterms. With EM! in turmoil,they argued, he could illafford to lose a top act thatserved as a creative magnet,drawing other artists to thelabel.

Mr Hands disregarded con-ventional wisdom, however,deciding the band's earningsdid not justify a possible£lOminvestment.

According to people famil-iar with the matter, heoffered just £3m.

Radiohead soon headed forthe exit, earning enormouspublicity for an onlinealbum launch and blastingEMI's new owners in theprocess.

"Terra Firma doesn'tunderstand the music indus-try," Radiohead guitarist EdO'Brien said flatly.

One supporter of MrHands counters that the inci-dent shows he understandsit "all too well".

The exchange goes to theheart of the debate over MrHands' biggest deal. Is abrash but brainy outsiderexactly what the industryneeds at a moment of crisis,or will such culture clashesmake him the latest wealthyamateur to fail on its glitter-ing stage?

"It is too early to answerthat question as we've notseen the grand plan," saysRich Greenfield, a music

industry analyst at PaliCapital.

Mr Hands' "vision state-ment" is due in mid-Janu-ary. But most of the indus-try has taken the negativeview. "I think they don'tknow what the hell they'redoing," says one long-termmusic executive. "GuyHands overpaid."

Interviews with some ofthe experts Mr Hands con-sulted reveal that severalfear that what he calls TerraFirma's "invasive" style maybe too much for an industrynotorious for insecure egos.

It has been a rocky start.Managers for artists such as

online discovery, an evolv-ing ecosystem that manyrecord executives confessthey barely understand.

The sales picture hasbecome bleaker since MrHands made his offer and MrGreenfield says it will getworse in 2008 as retailerssuch as Wal-Mart and Tescoreduce shelf space devotedto CDs.

The pain is visible acrossthe industry.

Shares in Warner Music,where private equity inves-tors have been working forthree years to fmd a moreprofitable business model,have fallen almost 75 per

Wholesale recorded musicMarket share, 2007 (%)

Core assumptions for EMIRecorded musicRevenueforecast (£m)

Source: Terra Firma presentation to investors

PublishingRevenueforecast (£m)

700600 - Organic-- _ Acquisitions _I500

200

100

o2006 07 08 09 10 11 12

Note: year ends to Mar, 2006 and 2007 are actual

FT Graphic

£4bn Mr Hands paid, but abroader question of whetherhe has a recipe to save themedia business sufferingmost acutely in the digitalera.

"It's the beast," Mr Sukinsays, "It's the question eve·ryone in the industry is try-ing to answer."

Some observers still hopeto see a "silver bullet" in MrHands' plan. "When an·industry declines faster thanexpected, everybody lookslike they're idiots, and theseare not all idiots," saysOsman Eralp, an industryanalyst. Indeed, most of MrHands' past investmentsh:lVE> ~hown :In nnr:lnnv

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let exists, however. DavidByrne and Brian Eno, themusicians, questioned theneed for traditional recordcompanies in Wired maga-zine this month.

With the recording, manu-facturing and distributioncosts labels once bore fallingto almost nothing, "all theyrepresent now [is] capital",Mr Eno said. "Some labelswill disappear," Mr Byrnepredicted.

Unless Mr Hands pulls outa surprise next month, manyexecutives will focus on thefeathers he has ruffledrather than the hard num-bers of profits, interest pay-ments and exit valuations bywhich his investors willmeasure success. But indus-try gossip is not irrelevantto the bottom line.

In a business where suc-cess still depends on chartpositions, losing artist sup-port could be the biggestmistake EM! has made.

"Artists are like deposi-tors," one analyst says, add-ing that: "If they find outyou're distressed they won'tgive you their record. Thenyou have the equivalent of arun on the bank."

·Ioo~----mnT.ft:ely--rrl""'tUC~-.ICa.1."

term. A revival of mergertalks with Warner, describedas "an obvious stop-gap solu-tion" by Michael Sukin, anindustry lawyer, also lookstricky in the current market.

At stake is not just the

Eric Nicoli: mews

Terra Firma can take £135mfrom fixed costs andmarketing budgets by 2012,over and above the.-£1l2msavings identified byprevious management,cancelling florists' orders willclearly not be enough.

nre-anu-rrrOSl.-lau.,-rlooking for ways into tour-ing, artist management ormerchandising businesses.

Industry stalwarts alsoquestion the financial side ofMr Hands' plans. His dealwent through just as tight-

labels have maintained theirown buildings and marketingteams and there has beenlittle centralisation of backoffice activities betweenEMl's 50 internationaloutposts.

Terra Firma has alreadysucceeded in negotiating acut to the $25m (£12.5m)EMIwas spending each yearon music industryassociations and is enforcinglong-ignored policies onartist signings and travelexpenses.

Mr Hands will also have toend the miscalculations thatled to past over-shippingand his ambitious targetssuggest that expectations offurther lay-offs among EMl's5,500-strong staff arewell-founded. Having toldwould-be co-investors that

I'STs-ro-oraUCn-lUl:u-areassuch as touring, according topeople familiar with thematter.

As part of the plan, MrCaparro proposed a team ofexecutives, who were notfrom major record compa-

prosaic - have leaked out ofexcesses that stand outeven in an industry famousfor its profligacy.

First on the list was amews house in Mayfair,used by Eric Nicoli,the

i former chief executive, andvisiting executives fromoverseas. The property waspromptly sold for £5.6m.

Spending reviews threw upmore oddities: a £20,000monthly candle bill for a LosAngeles apartment, untoldsums for often unwantedparties and gifts for artists,and the estimated £200,000annual cost of flowers andfruit for EMl's offices.

Mr Hands has beenequally unimpressed by thesheer number of offices,including two in centralLondon alone. Individual

Excess all areas - especially China, Mayfair and LAChina's roads are paved withCDs that turned from goldto dust in EMl's hands,according to people familiarwith Terra Firma'sdiscoveries since takingcontrol, writes AndrewEdgecIIffe-Johnson.

EMIhad been destroyingabout 35m CDs a year, theysay, bearing the£30m-£50m annual cost ofshipping albums to stores,taking back those that failedto sell and recycling theminto road-bUildingmaterialsfor the Chinese.

When Guy Handsannounced in Septemberthat "we get really happywhen things are really, reallybad," he was only justrealising the belt-tighteningopportunities at EM!.Sincethen, details - colourful and

o-craCl>tne-lT.50:t"'naS--SITUg-gled to develop big artistssince the glory days of sign-ing the Rolling Stones andthe Sex Pistols. Previouscost-cutting initiatives havedone nothing to improve itsmarket share.

t--nn~nT-"'''r. -r.mrrsome-acrS'"were-norpufI-ing their weight.

His -detractors argue thathis previous investments, inpubs and motorway servicestations, were not creativebusinesses.

"It's difficult to lead peo-ple who believe in theirheart that you don't get it,"a former label executivesays. "You can't go and tellthe creative community howscrewed up they are,"another veteran says.

According to people in MrHands' entourage, what thedoubters miss is that the cul-ture clash is, at least in part,deliberate. "You couldn't dowhat we're trying to do with-out tllree things," says one:"a very supportive bank, aclear view of where you'regoing, and chaos within theindustry."

Most EMI staff knowchange is needed. But thechaos may be worse than MrHands was betting. Compactdisc sales are tumbling atdouble-digit rates - muchfaster than they are beingreplaced by digital revenues.

The old model of launch-ing artists over radio is giv-ing way to a more complexand fragmented system of

neav--ycus-there, Terra Firma will stepup EMI's use of social net-working sites to find acts,shift its marketing towardsdigital sales and digitisemore of its catalogue.

Mr Hands has also let onthat he is looking to acquireindependent labels, and hasleft open the prospect of amore transforming deal suchas a move into touring andartist management or arevival of merger talks withWarner Music.

Even in the steadier pub-lishing business, TerraFirma expects to more thandouble ebitda from £107m to£221m over the period. Muchof this will come from cata-logue acquisitions, whichcould add £40m to EMIMusic Publishing's net pub-lisher share.

Less headline-grabbinggroup-wide initiatives suchas centralising procurement,back office and IT functionscould also save tens of mil-lions. The ambition is to re-invest some of the savingsinto developing new talent.The challenge will be toensure that artists are notfirst scared off by the tur-moil.

Edgecline-Johnson

Guy Hands is planning totell the staff of EM! in mid-January what he sees in thecompany that the legions ofdoubters do not.

Some of his plans havealready emerged from pres-entations to potential co-investors and the memosthat have been e-mailedaround a gossipy industry.

At the heart of his opti-mism is an analysis thatEMI is an asset-rich butpoorly managed businessthat is ready to make funda-mental changes preciselybecause of the turmoil inwhich the music industryfinds itself.

Many analysts agree, butsome have been startled bythe aggressive assumptionsTerra Firma has made.According to one presenta-tion, it expects EMI'srecorded music business todeliver £528m in earningsbefore interest, tax, deprE!cia-tion and amortisation by2012, up from just £61m in2007.

The projection assumes ahuge increase in online reve-nues, a rapid take-up ofmobile subscription and

Shell looks to outsourcenearly all 3,600 IT jobs

Big bookmakers in talks with Turf 1V

After signing up Coral, theonly one of the big fourbookmakers with no share-holding in SIS, Turf TV willbe on offer in about 60 percent of betting shops in theUK - more than 4,000. Thismakes it difficult for theremaining big high streetchains to continue theirresistance to the service.

Reuters

From January 1, 2008,bookmakers will need tohave a deal with both SISand Turf TV to ensure cover-age of all the races.

Until last week, onlysmaller independent book-makers, such as PaddyPower, Totesport and StanJames, had signed up toTurf TV.

The other 28 racecoursesare contracted to Turf TV'srival, Satellite InformationServices, whose shareholdersinclude Ladbrokes, WilliamHill and Betfred. SIS previ-ously showed racing from allUK courses, until about halfof the racetracks broke off toform their own company atthe end of last year.

Until last week, only smaller independent bookmakers had signed up for Turf TV

Turf TV is a joint venturebetween 31 of the UK's 59racecourses and Alphameric,a technology company. Thejoint company, called Amal-gamated Racing, is chairedby Alan Morcombe, the chiefexecutive of Alphameric. Itincludes top racecoursessuch as Ascot, Newbury,Aintree and Cheltenham.

Ladbrokes, William Hill andBetfred, three of the UK'slargest bookmakers, are intalks with Turf TV to takeits live TV horse-racing feedinto their betting shops.

The talks come after Corallast week became the first ofthe big four bookmakers tobreak ranks and sign a dealfor the new service.

The negotiations are arelief for Turf TV, which hasfaced stiff resistance fromthe high street bookmakers,some of whom run a rivalservice and who claimedTurf TV's annual fee of£6,500per shop was too high.

A five-year deal to supplyLadbrokes - which has morethan 2,000stores - is thoughtto be worth about £60m.However, Turf TV said nofurther contracts had yetbeen signed.

By Maija Palmer

TRAVEL & LEISURE

Negotiations a reliefafter stiff resistanceCoral deal weakensstance of big chains

time to learn more about thesuppliers as employers andas business partners."

Shell refused to commenton the apparent leak butconfirmed it was talking tocompanies about the out-sourcing of IT functions.

Shell said: "We are in themiddle of commercial discus-sions and expect contracts tobe signed in 2008."It is understood that about

3,200 IT jobs are to be out-sourced and about 10 percent of these jobs are UK-based positions. Theyinclude contractors and staffon Shell's pay-roll.If the outsourcing deal

goes ahead as plannedit would be one of thelargest ever. Shell employsabout 108,000 people world-wide. _

Jeroen Van der Veer, Shellchief executive, said thismonth the group had tocut costs to make up for thefact that the cost of gettingoil out of the groundhad risen 65 per cent intwo years.Jeroen Van der Veer: costs

been selected - EDS, AT&Tand T-systems - with con-tracts expected to be signedin March.

Ms Swee Chen told staff: "Iacknowledge that there willstill be uncertainty as we areworking through the finali-sation of contracts, openresourcing and transitionpreparations.

"I encourage you to keepan open mind and take the

By Rebecca Bream

OIL&GAS

Royal Dutch Shell isexpected to outsource thebulk of its information tech-nology division next year, amove that could affect about3,200jobs.

The oil group aims tomake pre-tax cost savings ofabout $500m-a-year (£250m)through streamlining itsstructure and cutting andoutsourcing jobs.

As part of this cost-cuttingdrive, Shell has been exam-ining whether to outsourcemost of its IT division,which numbers about 3,600people.

According to Shell protestwebsite royaldutchshell-plc.com, an e-mail from GohSwee Chen, vice-president ofIT infrastructure, was leakedby a Shell employee onDecember 19 and outlineddetails of the outsourcingdeal.

The e-mail said three out·sourcing companies had