Terra Firma, the new owner of EMI, is close to completing a £250 million equity fundraising, after telling would-be investors that it can lift profits in recorded music from £61 million in 2007 to £528 million in 2012.

The venture capital group, run by Guy Hands, is selling a stake of about 15 per cent of EMI, at what is thought to be broadly the same £1.5 billion equity valuation it applied when it took over the music major behind Kylie Minogue and the Spice Girls this year.

Terra Firma declined to comment and refused to name the investors, but the fundraising is a sign that others believe a recovery can be achieved in the company’s beleaguered recorded music division, which has slipped below Warner to be ranked fourth in the world with a 13 per cent share.

However, one analyst, Rich Greenfield of Pali Research, who had not seen the document, said that his “sense was that Guy Hands is coming under a lot of stress. Terra Firma cannot have expected the market to be this bad.”

The near-term worries were compounded by fourth-quarter and full-year results from Warner Music. It said total revenue fell 7 per cent on a constant-currency basis in the year to September 30, against a backdrop described by Edgar Bronfman, chief executive, as “very challenging”.

Yet, according to documents circulated to potential “co-investors” and seen byThe Times, Terra Firma is forecasting it can increase EMI’s profits massively by cutting costs by £135 million annually and outgrowing the sluggish music market. Yesterday The Times drew attention to several examples of overspending under previous management.

The strategy to increase underlying income in EMI’s recorded music by more than eight times rests on making those savings, plus others identified by EMI’s previous management. Higher margins from internet and mobile phone sales account for an extra £341 million of the uplift – although yesterday Warner Music said sales of ringtones in the US had declined.

Terra Firma is predicting an exit in 2012 which, if its plans come off, would mean the company being sold for an enterprise value of £9.4 billion – it was bought for £3.2 billion, including debt. Borrowings taken on in the wake of the deal are approaching £2.5 billion. At this sale price, Terra Firma’s annual rate of return would be 33 per cent.

Little mention is made of a possible merger with Warner Music, although it is highlighted as a possible exit strategy with potential for “significant cost savings”. There are suggestions that the recorded music business could be sold to a media conglomerate, such as Google or News Corporation, parent company of The Times, with the company “ideally placed to be a digital content engine for the broadband pipes of the future”.

There are also hints at future bolt-on acquisitions, with references to £100 million already available for buy-ups, plus a possible extra £200 million, with the cash to be split between buying independent record labels and bolstering EMI’s one million strong music publishing catalogue.

Terra Firma’s analysis indicates that the overall recorded music market – which is declining by 10 per cent annually – will recover by 2010, and that the overall decline will be 1.1 per cent compound between 2007 and 2012. The estimates are that CD sales will fall by 11 per cent a year but that digital sales will increase by 30 per cent annually.

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