EMI in dire straits as talks with Universal and Sony collapse

Music label left with two months to raise £120m and keep creditors at bay

EMI's attempts to secure a licensing deal with rivals fell apart yesterday, heaping pressure on the struggling label as it seeks to raise £120m in less than two months or face being seized by its creditors.

The music group, whose artists include Lily Allen and Robbie Williams, had been locked in separate negotiations over the past week to offer Universal Music Group and Sony Music distribution rights for its artists in the US and Canada.

Talks with Universal were understood to be the furthest advanced, but fell apart at the 11th hour as the two sides failed to reach terms over price. Charles Allen, who took over as the head of EMI last month, called off the talks yesterday. Negotiations with Sony have also come to nothing.

None of the companies would comment yesterday, but sources close to the deal said both the rival labels had approached EMI with proposals. The discussions were understood to have focused on a five-year deal for the rival labels to secure the rights to sell EMI artists in North American stores as well as digitally. Such distribution deals are relatively common, one insider said. EMI had hoped to raise £200m from the deal.

The company's holding vehicle had revealed in annual results published earlier this year that the business was in danger of breaching its banking covenants. Yesterday's failure to secure a distribution deal means the company is likely to have breached its covenants for the quarter. Mr Allen now has until 14 June to come up with a plan to raise £120m, to avoid the company defaulting on its loans.

One insider said the company was not in talks with any other companies over alternate deals, adding: "Plan A is still the focus." This involves the company's senior management putting together a business plan to secure the future of the group to take to parent company Terra Firma.

Should the private equity group, fronted by the industry tycoon Guy Hands, back the plan, it will call on investors to put up the cash needed to avoid debt holders Citigroup from taking control.

Terra Firma bought EMI at the height of the private equity leverage bubble in the summer of 2007 for £4.2bn. The takeover saddled the company with huge debts, which had been provided by Citigroup.

The company was almost immediately hit by the onset of the credit crunch. This also came at a time when the music industry was undergoing profound change in the shift to digital, and EMI suffered from the rise in illegal downloading of artists over the internet. Its catalogue also suffered the defection of several high-profile artists shortly after the deal, including the Rolling Stones and Radiohead.

Terra Firma's relationship with EMI's principal debtholder has become strained to breaking point. The buyout firm has launched a lawsuit against Citigroup, which provided £2.5bn of the company's £3.2bn debt for the deal, over its role as defence adviser to EMI. Mr Hands alleges that the bank led Terra Firma to believe that other bidders were interested, which pushed up the price of the acquisition.

EMI's former chief executive Elio Leoni-Sceti admitted that the legal wranglings had made it harder to sign new acts. Earlier this month, Mr Leoni-Sceti made the surprise announcement that he was to quit the group. Charles Allen, the former chief executive of ITV, who was EMI's non-executive chairman, filled the vacancy by taking over as executive chairman.

Several EMI artists are doing well in the UK charts. Gorillaz' new album, Plastic Beach, is No 12 in the charts, with Laura Marling and Goldfrapp in the Top 10. The label remastered albums by Kraftwerk and the Beatles last year, with the Beatles' release selling 10 million copies in just four months. It is also set to release new albums from Chemical Brothers and LCD Soundsystem.

Hitting the high notes: The history of EMI

*March 1931: The Electric and Musical Industries is formed through the merger of the Columbia Graphophone Company and the Gramophone Company. It opens recording studios at Abbey Road, north London, the same year. EMI's roster of artists now includes Lily Allen and Alison Goldfrapp.

*August 2007: Terra Firma secures takeover of EMI for £4.2bn. Radiohead and Rolling Stones leave shortly after. Sir Paul McCartney had left before the deal was signed.

*January 2008: Terra Firma forced to restructure the company, drawing up plans to cut up to 2,000 employees. The previous week, UK boss Tony Wadsworth quits after 25 years.

*November 2009: Guy Hands sends letter to Citigroup offering to raise £1bn of new equity if the bank writes off £1bn debt.

*February 2010: Maltby Capital, holding vehicle for EMI, reveals pre-tax loss of £1.7bn for the year to the end of March 2009. Reveals group could breach covenants; auditors KPMG warn over its status as a going concern.

*March 2010: Elio Leoni-Sceti announces he is to quit the group after just 18 months. Chairman Charles Allen takes over. In the same month, Pink Floyd successfully sues EMI over selling individual tracks digitally. Talks with Sony Music and Universal over a North American distribution deal fall apart.

*June 2010: Deadline for company to raise £120m to avoid breaching debt covenants.