The Real Deal

Bankers bored with the credit squeeze are now obsessing over Guy Hands and his £4bn ($8.2bn) investment in EMI.

Word is that the chief executive of buy-out group Terra Firma is in a wild panic about his impulsive acquisition and how he'll manage to make a return on the record company he bought on the back of 43 pages of basic due diligence.

The first problem is the amount of equity he's injected. Mr Hands used 20 per cent of his old fund and 25 per cent of his new fund, totalling about £1.5bn. In other words, he bet a huge amount on just one deal - a big taboo in private equity as investors do not typically allow more than 15 to 20 per cent of a fund to be used on a single transaction.

Second, he has diverted about two-thirds of his team to work full-time on EMI - part of the reason why no one at the company has time to work on a bid for Jaguar/Land Rover or any other interesting opportunity.

Third, Mr Hands' aim of improving the investment by two to 3.9 times sounds remarkably familiar, taking out $233m of fixed costs. But back in January, EMI had already identified cuts of £110m annually by 2009, or about 5 per cent out of its fixed-cost base, and squeezing out more without destroying the business looks tough.

Fourth, one model does not fit all in private equity. Mr Hands is best known for making money by issuing bonds against the cash flow of his investments. But securitising anything in this credit crunch, let alone future earnings of rock stars, is impossible. Remember how David Bowie fell to earth when his bonds were downgraded from A3 to Baa3 in 2004 after a slump in sales in the wider record market?

Fifth, artists working for EMI must hate Mr Hands after he told investors he will sack those not working hard enough. These are rock stars, not German state-owned properties.

Mr Hands wanted EMI because he underbid on both Thames Water and Alliance Boots and it was becoming em--barrassing to keep losing to the big boys such as Macquarie and KKR. However, nothing can be as bad as winning the wrong auction.

lina.saigol@ft.com