Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Here's a tip to buyout funds that rely on bank debt to buy promising companies. Don't take those same banks to court unless you're sure you have a very, very good case. 

Terra Firma's Guy Hands clearly thought he had his reasons to haul Citigroup before a London court this week over his 4 billion-pound ($5.7 billion) 2007 takeover of record label EMI Group -- a deal so disastrous that it cost 200 million euros ($225.7 million) of his own money, shot Terra Firma's reputation and led to storied artists like Radiohead and Robbie Williams (remember him?) quitting EMI.

Terra Infirma
Terra Firma's annual investments over the past decade by deal size. The firm bought EMI in 2007.
Source: Company website

Hands claimed that Terra Firma only bought the company because bankers at Citigroup misled him -- allegations rejected by Citigroup.

But Hands' decision on Friday to drop the case that had only begun on Tuesday -- leaving Terra Firma to pay Citigroup's costs, which some lawyers reckon could bring the total bill into the millions -- suggests a bad judgment call on how to spend money and time. 

As Hands said in his own statement Friday, Terra Firma's documentation of events -- and memories of those events -- "are no longer sufficient to meet the high demands of proof required for a fraud claim in court." That sounds like something he should have known ahead of time. 

Terra Firma says the matter is closed. If the case seemed like the act of a man with nothing to lose, it's pretty clear now that the whole affair has cost him.

The fact is, the damage to its future relationships to financiers and investors has been done.

Citigroup was both providing advice and financing the deal. Hands alleged that the bank pushed him to raise his offer for EMI in order to beat a rival bid, but that in fact the auction contained no such bidder. 

So when Hands said in court this week that his expectations for a "level playing field" were disappointed, Citi's lawyer, Mark Howard, could counter that the advice the bank was giving him behind the scenes meant the field was actually "entirely loaded" in Terra Firma's favor. Which opened a new line of questioning that's embarassing for Hands:

Howard: "Do you think that’s an honest way to approach business?"

Hands: "In my experience, it’s the way auctions are conducted."

Howard: "Is it honest or not?"

Hands: "Sitting here today, it doesn’t sound very nice."

There's also the matter of the depth of Hands' grip on the situation. When asked in court about the prospects for resurrecting his reputation, he said:

"I made that investment trusting certain individuals and I think most investors out there, particularly in hindsight based on what they’ve read in the press over last few years, will find that I should not have trusted those individuals, but I did."

None of this is likely to make good reading for current or future investors in Terra Firma, which hasn't raised a leveraged buyout fund on the scale of its previous funds since the EMI debacle. 

An investor might wonder how much Hands was investing on trust and advice rather than on due diligence and his own assessment of fundamental valuation.

And, a prospective lender might wonder what the fallout will be if a future investment goes sour. Ill-judged trips to court seem to be acceptable to Hands. 

Terra Firma's ploughing ahead. In a statement today, the firm said it has "supportive and loyal investors and one billion euros of capital to invest."

Hands was probably right that backing down now would have been a better option than going through to the bitter end. It just raises the question of why this whole sorry adventure began in the first place.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at

To contact the editor responsible for this story:
Jennifer Ryan at