Guy Hands and private equity have all the right answers for the music industry's mega-egos and mega-expenses accounts.

When an industry is in upheaval, sometimes the decision to make redundancies can be vital to the ongoing health of those businesses, and our economy at large – even if that is little consolation to the poor souls at the receiving end.

On the other hand, is anyone else enjoying the way private equity is dragging the music business’s prima donnas into economic reality? What self-respecting impresario wouldn’t throw a tantrum: no more sushi flown in fresh from Japan. No more million pound Mayfair pads for EMI executives. Just some of the drastic restructuring initiatives that face the axe now that Guy Hands is in the driving seat.

And let’s get one thing clear. The media hysteria surrounding Hands’s shake-up of EMI has little to do with the pending 1,500 to 2,000 redundancies. The hype is because an arrogant outsider has charged in, threatening a wholesale restructuring, which means it’s not just the little people that are taking the pain for once – now the budget for candles and fresh flowers is facing the chop too. Sulky stars are outraged.

“[Hands] wouldn’t give us what we wanted. He didn’t know what to offer us,” said Ed O’Brien, Radiohead’s guitarist, before the band walked. Robbie Williams’ owner accused Hands of running the business “like a plantation owner".

Of course, it’s right that these superstars get more air-time than the 2,000 jobless workers – after all, this is an industry built on a few big egos. Or is it?

Actually, that seems highly unlikely. Firstly, the part of the business that is causing all the controversy, the recorded music division, accounts for just 10 per cent of the business. Most of the remainder is in the stable music publishing business. Hard as it might be for indulged superstars to believe, the fate of this mega LBO, which took scores of top financiers and lawyers many months to structure, is not dependent on their whims.

That is because Terra Firma is looking at a fundamental restructuring of the business. By that, I mean the boring stuff. Streamlining the back-office. EMI currently has 19 bureaucrats to every talent scout. Now Hands has put all the processing into one-music services division, under the leadership of ex-BAA chief Mike Clasper. Terra Firma will revolutionise and commercialise earnings streams. He has employed two of the corporate world’s fiercest restructuring managers – Pat O’Driscoll of Northern Foods, and Lord Birt, once described as a Dalek, to oversee the process. This is just what the business needs and only a private equity owner could have ever delivered it.

The other two reasons are circumstantial, but they speak volumes: in the middle of a credit crisis, when other deals were being pulled left, right and centre, Terra Firma’s bankers Citigroup, finding themselves with an unexpected £2.5bn unsyndicated EMI debt package, merely asked for a £250m equity injection on top of the originally negotiated £1.5bn equity sum.

Third, Terra Firma successfully sold much of that extra equity on to co-investors on the same terms as the original deal. The chance of them buying into a highly leveraged structure that’s securitised against Robbie Williams and co are slim.

Even so, EMI faces a huge challenge with the onslaught from digitisation. Prior to its buyout, the business’s fate could well have been terminal decline. However, the ruthless focus that private equity ownership can bring is the best chance such companies can have to survive and prosper.

But there is something else going on here. Amid a hugely competitive mega buyout market, only one firm seriously wanted to take on EMI. This is odd, especially considering the indications that the buyout arithmetic is fairly sound. One rationale is that there are big egos on both sides of this deal.

Music and private equity are both industries were a bit of arrogance can be a plus. Guy Hands is private equity’s own enfant terrible, a maverick in an industry of mavericks. He has revolutionised the financial markets with his use of securitisation. He calls his bankers “whimpering dogs.” He buys a music business and infuriates insiders by saying it is no different to a pub, train or aircraft leasing business. And perhaps because of his own self-consciousness, he has a knack for bringing other egos down to earth. After sacking managers at Odeon Cinemas for jetting off to see premiers in the US, he said, “they thought they were in the film business, but actually they were in the popcorn business.”

In short, he wields the private equity model with just the right amount of flamboyance, arrogance – yes, even creativity – to take on this particular challenge. And the real beauty for Hands is, the harder EMI looks now, the more of a hero he will be if it works out. Either way, in the fight between the super egos of music and finance, I know whom I would back.

Ross Butler is editor of Real Deals, Europe's leading private equity title and sister title to Real Business. This article is Ross's editorial leader in the January 24 edition of Real Deals.

Related story: Dear Guy Hands: how to work with rock stars

Related tags: terra firma, music business, citigroup, music publishing, private equity owner, emi, lbo, private equity, robbie williams, buyout, guy hands, private equity ownership, private equitys, prima donnas,