Citigroup Inc. seized control of EMI Group Ltd. after the record label struggled to meet the terms of loans used to finance its takeover by Guy Hands, opening the way for a sale of the 114-year-old company.

The U.S. bank, which funded Hands’s takeover in 2007, will own all of EMI after the debt-for-equity swap, the company said in a statement today. The deal will reduce London-based EMI’s debt by 65 percent to 1.2 billion pounds ($1.94 billion).

The agreement may lead to a sale of a record label of the Beatles and Pink Floyd. Warner Music Group Corp. and BMG Rights are among bidders that have expressed interest in EMI’s publishing and recorded assets. Last year, Hands sued Citigroup, saying it had tricked him into buying EMI, and sought extra cash from his backers to stop the label breaching debt covenants in a bid to avoid losing control of his most high-profile investment.

“Given the emotion with which Hands had defended his purchase, and the vituperative quality of his interactions with Citigroup, there was a feeling that he might cling to the business until the final moment,” said Claire Enders, chief executive officer of Enders Analysis Ltd., an entertainment industry research firm based in London. EMI “wasn’t going to breach covenants until the end of financial year in March.”

BMG is now the most likely buyer, Enders said. Warner, which abandoned a takeover for EMI in 2007, held talks in 2009 to make a joint offer with KKR & Co. Warner Music is itself now seeking bidders.

Warner Merger?

“Faced with the possibility that EMI may disappear, allowing a merger with Warner would be logical,” said Claudio Aspesi, an analyst at Sanford C. Bernstein, and former EMI executive.

Terra Firma said in a statement it was “pleased” that EMI’s debt had been reduced through Citigroup agreeing to write down “a substantial proportion” of EMI’s debt.

Danielle Romero-Apsilos, a Citigroup spokeswoman in New York, and Amanda Collins, a spokeswoman for Warner Music, declined to comment. Calls left with BMG weren’t immediately returned outside of business hours.

The deal “has given us one of the most robust balance sheets in the industry with a modest level of debt and substantial liquidity,” EMI chief executive officer Roger Faxon said in the statement.

Hands said in a November speech he and his firm “would have looked like geniuses” had they not invested in EMI. Terra Firma Capital Partners Ltd., Hands’s LBO firm, bought EMI for about 4 billion pounds ($6.5 billion), including debt, at the height of the buyout boom. Citigroup provided about 2.5 billion pounds of loans to finance the purchase.

Banker ‘Dogs’

The purchase closed in August 2007, months before the credit crisis struck. Citigroup never found investors willing to take debt it provided for EMI off its balance sheet. Four months after buying EMI, Hands called bankers “dogs” as debt funding for further leveraged buyouts dried up.

Hands, 51, struggled to return EMI to profit as teenagers turned to file-sharing Web sites that let them download songs for free, destroying profits in the record industry. Acts from Queen, Paul McCartney, and the Rolling Stones left the label. The company slipped from a profit of 86 million pounds in fiscal 2006 to a loss of 1.57 billion pounds in 2009.

By February last year, Terra Firma had written down the value of its 2.6 billion-euro EMI investment to zero, according to a letter sent to its investors.

Hands held talks with Citigroup to restructure the debt, which foundered by November, as the two disagreed over the valuation of the record label. That month, Hands lost a court battle against Citigroup in New York, in which he said the bank tricked him into overpaying for EMI.

Future Funds

“EMI is what EMI is,” Hands said in his November speech. “There’s nothing we can do about that. We can do two things. We can invest the rest of our money well and we can look after the rest of the portfolio. If we do those two things well, we’ll raise another fund. If we do them badly, we won’t. It’s as simple as that.”

Hands’s previous biggest loss was in 2003, when he wrote off a 318 million-euro investment in Le Meridien hotels as business travel slumped following the Sept. 11, 2001, terrorist attacks in New York and Washington.

“The private equity world has long known that Hands made a colossal mistake buying EMI,” Enders said. “However, he is a maverick, and he’s not a finished man.”