Abbey RoadEMI, the legendary recording industry titan responsible for releasing albums by the likes of the Beatles, Pink Floyd and Coldplay is in danger of defaulting on its debt and being taken over by Citigroup (C), its largest creditor.

Feverish talks to license its catalog or raise more money fell through, Reuters reported Wednesday morning, largely because of the complexity of the financing deal.

EMI, which was bought by the private equity firm Terra Firma in 2007, needs to raise an undisclosed amount of cash by the end of today, March 31, in order to meet a debt covenant and avoid being taken over by Citigroup in June.

The Financial Times, in reporting on the deal's abandonment, noted that there were internal concerns that the sale could have been blocked by Citigroup.

All Fall Down

Earlier this week, reports surfaced that EMI was negotiating with Vivendi-owned Universal Music Group over the rights to distribute EMI's catalog in the Americas for the next five years in exchange for $300 million up front.

Wednesday morning, Reuters reported that those talks had run aground, largely because of the complexity of the financing deal. Talks for a similar arrangement between EMI and Sony's Sony Music Entertainment division also fell apart.

If EMI fails the banking covenant test, Terra Firma will have until the middle of June to get the company's financial books in order. Failure to do so will result in Citigroup, which Terra Firma borrowed heavily from in order to finance its purchase of EMI, taking over the record company.

Terra Very Firma

Since Terra Firma purchased EMI in August 2007 for $6 billion, the worldwide market for recorded music has declined and credit markets have tightened. Approximately $2.6 billion of the money Terra Firma used to purchase EMI came from a Citigroup loan.

Like the other major labels, EMI has been walloped by a worldwide decline in record sales. In 2009, it had 9.2% of the American recorded-music market, which was up from its 9% market share in 2008 but down from its 2006 share of 10.2%.

The company reissued a slew of albums by the Beatles -- who were the best-selling musical act of the last decade -- in September 2009. Coldplay's 2008 album, Viva La Vida Or Death And All His Friends, sold 2.7 million copies, but new releases by other acts on the label have stalled in the marketplace; EMI commanded only 7.8% of the market for current releases in 2009.

Hands Down Failure

In 2008, Terra Firma wrote off approximately half of its investment in EMI and the company's founder and chairman, Guy Hands, stepped down as CEO. Terra Firma has subsequently sued Citigroup, saying that the firm artificially inflated EMI's price during negotiations by claiming that Cerberus Capital Management LP was bidding on the company as well. A trial is set for October.

In February, Terra Firma was reportedly interested in selling Abbey Road Studios, where the Beatles recorded many of their most iconic tracks, to raise capital. In the wake of public outcry, the studio was given protected status by the British government. The company responded to this move by saying that it was merely looking to "revitalize" the iconic building.

On the bright side, EMI currently distributes one of the year's biggest-selling albums, Lady Antebellum's Need You Now. It has sold 1.5 million copies and is the only album released in 2010 to break the million-sold mark.

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