State Champ Radio Hipgnosis Songs Fund
Concord and Blackstone are in a bidding war to acquire the equity of Hipgnosis Songs Fund (HSF). On Wednesday (April 24), Concord bid $1.25 per share for HSF’s share capital, beating Blackstone’s offer of $1.24 per share (1.00 GBP), or $1.5 billion, announced on Sunday (April 21). In response to Concord’s latest offer, Blackstone said on Thursday (April 25) that it was “considering its options.”
Concord had opened with a bid of 0.93 pounds ($1.14) per share, equal to $1.4 billion, on April 18.
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Some investors are betting the bidding will go well above the current offers. On Tuesday, shares of HSF rose as high as 1.03 pounds ($1.28) respectively, 3.2% above Blackstone’s offer, and closed at 1.01 GBP ($1.26), 1.6% above its bid. Nearly 78 million shares traded hands that day — about 11 times the average daily trading volume over the previous three months. Even before Concord’s second bid of 1.00 pounds ($1.25) per share was announced on Wednesday, shares of HSF peaked at 1.016 pounds ($1.27) and closed at 1.014 pounds ($1.26).
Investors who want to capitalize on an eventual acquisition will buy HSF shares up to — but not equal to — their expected deal price. If investors thought the deal would happen at $1.30, they could bid up to $1.29 per share and make a small yet quick profit. Shareholders will vote on an acquisition offer at HSF’s June 10 shareholder meeting.
The same dynamic was recently seen after Believe became the subject of takeover talks. When a consortium of investors announced a bid of 15.00 euros ($16.04) per share, investors immediately bid the share price up to 14.22 euros ($15.23) but suspected it wasn’t wasn’t the final offer. Even before Warner Music Group (WMG) announced it was interested in acquiring Believe for at least 17.00 euros ($18.18) per share, shares were trading around 15.25 euros ($16.31), nearly 2% above Believe’s offer.
Concord could have two advantages that would allow it to bid higher than Blackstone: its source of funding and its ability to administer HSF’s portfolio. “If all else is equal,” Stifel analysts wrote in a Monday (April 22) note to investors, Concord can outbid Blackstone because it has a lower cost of capital — Michigan Retirement Systems, a state pension fund — and a superior ability to “extract revenue from an under-managed portfolio.”
But Blackstone has a trump card: Hipgnosis Song Management, which is majority owned by Blackstone, has an investor advisory agreement with HSF gives it a call option to acquire HSF’s portfolio if the advisory agreement is terminated. Stifel analysts believe the call option could act as “a deterrent” to prevent further price escalation — although it didn’t prevent Concord from bidding a second time. HSM appears determined to employ the call option. In a April 22 statement, HSM said it was “confident that the [Songs Fund] has no legal grounds to terminate our relationship without being subject to HSM’s contractual rights contained in the [investment advisory agreement, or IAA].”
Investors run the risk that the bidding process for HSF won’t transpire as they anticipated. In the case of Believe, WMG never made a formal offer and eventually dropped out of consideration — which could leave investors who bought Believe shares as high as 16.58 euros ($17.73) in the red if the acquisition proceeds at the original 15-euros per share offer.
Concord Music raised its bid to take over Hipgnosis Songs Fund (HSF) on Wednesday (April 24) to $1.25 per share, one penny higher than the competing offer that Blackstone floated on April 20 — further ratcheting up the fight for control of the music rights company’s assets.
Concord’s new all-cash offer values Hipgnosis’s assets — which include rights to songs by Red Hot Chili Peppers, Christine McVie, Blondie, Shakira and Journey — as worth around $1.51 billion. It includes a plan to sell up to 30% of Hipgnosis’ assets within 18 to 24 months of an acquisition, according to a filing with the London Stock Exchange.
HSF’s board of directors unanimously recommended shareholders approve this new bid from Concord, a reversal from Monday (April 22) when those directors said they would support an offer from Blackstone equivalent to $1.24 per share if the investment giant made it official. Blackstone’s bid remains a “possible offer,” according to the company’s statement on Saturday (April 20).
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“Concord … remains committed to becoming the new owner of Hipgnosis,” the filing reads. “The Hipgnosis Directors believe that the Increased Concord Offer is in the best interests of Hipgnosis Shareholders as a whole, and accordingly unanimously recommend that Hipgnosis Shareholders vote in favour of the resolutions required to implement the Increased Concord Offer to be proposed at the Court Meeting and the General Meeting which are due to be held on or around 10 June 2024.”
The new offer presents a 42.6% premium over HSF’s closing share price on April 17, the day before Concord’s initial offer became public. Any offer will require the support of investors representing at least 75% of the company’s public shares at a court meeting expected to be held on June 10; until that date, additional new offers may still be lodged.
Concord plans to finance the acquisition through a combination of debt and equity, with the majority of the equity financing coming from Concord followed by “minority participation by Apollo Funds.” Apollo will also provide the debt, the amount of which has not been disclosed.
Blackstone floated a “possible offer” of $1.5 billion, or $1.24 per share, to buy Hipgnosis Songs Fund over the weekend. The private equity giant owns two other entities under the Hipgnosis name, including a private music royalty fund with its own catalog holdings worth more than $700 million. Blackstone has yet to file an official bid.
Last year, Concord acquired Hipgnosis rival Round Hill Music Royalty Fund for $468 million in the biggest catalog deal of 2023. Through that acquisition, Concord gained rights to over 150,000 songs, among them works by The Beatles and tunes recorded by Elvis Presley, Meatloaf, James Brown and Billie Holiday.
The cloudy future of Hipgnosis Songs Fund (HSF) became clearer on April 18, when the embattled company’s board of directors publicly supported a $1.4 billion takeover bid by Concord, followed two days later by a $1.5 billion offer by investment giant Blackstone.
Regardless of the buyer, an acquisition would mark an end to the 5-year-old London Stock Exchange-listed company and give shareholders an offramp after HSF faced questions about its operational acuity and, most recently, alleged evidence of accounting missteps that overstated both revenue and its portfolio’s valuation.
Concord’s offer is a 32.2% premium over HSF’s closing price on April 17, but the board said it would support Blackstone’s offer — which represents a 41.8% premium — if the asset manager makes it official.
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Blackstone’s bid for the publicly traded music rights company wasn’t a surprise: It owns two other entities under the Hipgnosis name. Blackstone is the majority owner of the public fund’s investment adviser, Hipgnosis Song Management (HSM), and it funds Hipgnosis Songs Capital (HSC), a private music rights fund operated with HSM that has its own portfolio of music rights from such stars as Justin Bieber and Kenny Chesney. Sources say Blackstone’s private fund, HSC, is worth upwards of $700 million. HSM has the right to buy HSF’s portfolio if its advisory agreement is terminated — and Blackstone and HSM “will vigorously protect its interests should the company purport to terminate the [investment advisory agreement],” according to a statement issued by HSM on April 22. “We will use all means necessary to defend our contractual position and interests.”
Neither HSF nor HSM responded to requests to comment for this story.
When investors vote on a proposed acquisition at HSF’s June 10 board meeting, a majority of stock- holders representing at least 75% of voting rights must approve the deal. Before Blackstone’s offer, Concord’s bid had the support of shareholders that own 29.4% of the company’s equity.
Any offer would free the fund and its investors from a serious bind. Once a freewheeling darling of the music business that acquired rights to music by Red Hot Chili Peppers, Neil Young and Shakira, the company suffered from a struggling share price, the cancellation of the dividend and — the coup de grace — an unflattering due diligence report by investment bank Shot Tower Capital released March 28 that found the company’s investment adviser, the Merck Mercuriadis-led HSM, committed a series of missteps. Among them: HSM “materially overstated” annual revenue by improperly accounting for revenue and missed growth forecasts on 75% of the fund’s catalogs by an average of 23% annually, and the investment adviser overstated the amount of control that HSF has over the rights it had acquired. The latter conclusion is key to the value of HSF’s portfolio because owning a song’s copyright is more valuable than owning a writer’s or producer’s share of the royalties it generates.
As a result of its findings, Shot Tower lowered HSF’s portfolio value by 26%, from $2.62 billion to $1.95 billion.
“Shareholders are going to vote for whichever [bid is] the higher,” says Josh Gruss, co-founder and CEO of Round Hill Music, who until last November, ran Round Hill’s rival publicly listed music royalty fund. (Concord bought that public fund last year, and Gruss became a Hipgnosis shareholder a few months later.) “I think investors have been through such a roller coaster most of them just want their money back.”
HSM’s response to the Shot Tower report, which was issued the same day, claimed that aspects of it were “factually inaccurate and misleading.”
Not surprisingly, several of HSF’s largest and most long-lasting investors were angered by the report’s findings. Investment managers, some of whom spoke on the condition of anonymity because they did not want to comment publicly before the next board meeting, said that the report’s findings presented extraordinary examples of gross incompetence and “myriad” accounting issues.
Stifel analyst Sachin Saggar, who raised red flags about the company’s accounting and valuation as far back as 2021, says the Shot Tower report revealed “a catalog of errors” that should have been prevented by the layers of protection — a board of directors, an independent auditor, internal systems and adherence to accounting principles — typically afforded to investors.
“If you had a half-decent board at [the initial public offering], you [could] have stopped some of these things happening very easily because they’re quite obvious and they were well-flagged by us three years ago.”
Merck Mercuriadis on Feb. 8, 2021 in Los Angeles.
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While the offers could be the answer to HSF’s financial straits, if the Concord bid gets accepted, one question remains: What becomes of Mercuriadis, who is the founder and public face of Hipgnosis, the chairman of HSF’s investment adviser and, until recently, the cocksure self-appointed spokesman for the red-hot song catalog sales market?
The Shot Tower report reinforced doubts that the board can continue to work with Mercuriadis and his team — one investor deems the relationship “broken down” — although parting with him is easier said than done.
Terminating the investment adviser’s contract without cause would give HSM a termination fee and, more critically, an option to buy the entire portfolio at whichever is highest: fair market value, a third party’s bid or the company’s market capitalization.
According to the April 18 announcement, Concord would take over management of HSF’s assets after “a brief transition period” during which Mercuriadis’ HSM remained the investment adviser. The announcement stated that the two sides have not yet begun discussions about terminating the investment advisory agreement.
Matt Hose, a London-based equity analyst for Jefferies, says the HSF board “is trying to highlight that Merck was incompetent so they can terminate [the investment adviser] with cause and not pay out the fees.” He adds that this strategy would prevent Mercuriadis from “stopping the board from selling the portfolio in the open market and getting full value.”
Removing the investment adviser would be an unusual outcome. Hose says he has never seen an investment manager terminated for cause in the 15 years he has covered investment trusts.
HSF’s largest investors support terminating the investment adviser’s contract, but they were reticent to say that the board can prove it has sufficient reason to fire HSM “with cause.”
“People are pretty fed up with the [investment adviser] as a result of this [report],” one investment manager says. “There are some quite extraordinary allegations in this report. I don’t think I’ve seen accusations of gross incompetence laid out in this way. I’ve seen accusations of fraud, but not this.”
Hose points out that, counterintuitively, HSF’s stock price rose 10% on the day the Shot Tower report was released.
“Shareholders want termination for cause because it’s the cleanest exit. Whether they’re going to get it or not — that’s the question.”
If the board moves to terminate the investment manager with cause, investors say Mercuriadis and Blackstone may fight it in court. In such a scenario, they say the two sides would probably settle with HSF for a lump sum of money but not the right to buy the portfolio. They note that a prolonged court battle would bring Blackstone the kind of negative headlines it’s known to avoid.
Other catalog portfolio managers say, bad press be damned, Blackstone will not give up its right to HSF’s quality assets.
“The underlying assets are solid, whether they paid one turn or two turns too much,” says David Schulhof, CEO of music-focused exchange traded fund MUSQ.
A Blackstone acquisition, on the other hand, would be the best outcome for Mercuriadis, as HSM would continue to oversee the portfolio. Regardless of how the aftermath plays out, half a dozen HSF investors and analysts said they cannot see Mercuriadis and HSM remaining the investment manager of a publicly traded fund or the fund continuing as a publicly listed entity.
“It has to spin into a sale at this point,” Round Hill’s Gruss says. “It’s clear that even before these announcements shareholders were hell bent on removing Blackstone as the investment adviser, through legal means or otherwise. It’s a much more elegant solution for shareholders to just sell.”
Despite the enduring value of much of HSF’s portfolio, the board is telling shareholders that a quick sale is their best option. In its April 18 announcement, the board indicated that accepting Concord’s bid would “[mitigate] the risks we see ahead to achieving a material improvement in the share price.” Other than an outright acquisition, it warned, “all alternative options carry significant risks, uncertainties and limitations.”
A version of this story will appear in the April 27, 2024, issue of Billboard.
Hipgnosis Song Management (HSM), the investment advisor for the troubled music royalty fund Hipgnosis Songs Fund that has come under scrutiny for its handling of accounting issues, released a statement Monday (April 22) saying it has “repeatedly been blamed for many issues affecting the [Songs Fund] which were not HSM’s responsibility” and that it “will vigorously protect its interests should the [Songs Fund board] purport to terminate” it as investment advisor.
The statement comes after a wave of headlines in the past month dating back to the March 28 release of a report by Shot Tower Capital which alleged that HSM, as investment advisor for Hipgnosis Songs Fund — which owns full or partial rights to song catalogs from the Red Hot Chili Peppers, Shakira and Neil Young, among others — overstated its revenues, the scope of its assets and its earnings in disclosures to investors and regulators. That followed a vote last October in which shareholders first rejected a proposed sale of some of the fund’s song catalog and a subsequent vote of no to continuation — the equivalent of a vote of no confidence — in the fund’s previous board and its investment advisor HSM, prompting the formation of a new board with a new chairman, Rob Naylor. (Merck Mercuriadis, the founder of the fund, moved from CEO of HSM to chairman in February.)
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In the past few days, two potential takeover bids have been submitted to the board of Hipgnosis Songs Fund: one from Concord at $1.4 billion and the other from Blackstone, which is the majority owner of HSM, at $1.5 billion. The initial Concord bid suggested that the publishing company would take over management of the fund’s catalog from HSM, which would require 12 months’ written notice; a fee equal to one year of services; and, at the end of that year, allowing HSM to exercise a call option to buy the portfolio’s assets by outbidding any competing offer, according to previous filings.
In the new statement, HSM indicates that it would exercise that call option if it becomes necessary.
“Based on extensive legal advice we are confident that the [Songs Fund] has no legal grounds to terminate our relationship without being subject to HSM’s contractual rights contained in the [investment advisory agreement, or IAA],” Hipgnosis Songs Management’s statement reads. “HSM has explained this in detailed legal correspondence with the [fund]. The [fund] has not responded to HSM on the legal arguments it has presented.
“HSM will vigorously protect its interests should the [fund] purport to terminate the IAA,” the statement continues. “We will use all means necessary to defend our contractual position and interests. It is important that shareholders, songwriters and artists understand that HSM has acted appropriately and professionally in our role as Investment Advisor and fully in accordance with the IAA.
“To be clear, were the [fund] to purport to terminate the IAA and/or hand HSM’s responsibilities under the IAA to a third party, HSM and its majority shareholder are fully resolved to protect all of our rights under the IAA, including the right to exercise the call option to acquire the [fund]’s assets.”
Earlier today, the board of Hipgnosis Songs Fund said that, were Blackstone to officially file its $1.5 billion bid to take over the company, it would support that option over the Concord bid from last week. And given Blackstone’s majority ownership of HSM, it would presumably follow that HSM would then continue in its role as investment advisor, meaning HSM would not have to exercise its call option in the end. The Blackstone bid is effectively the same as the call option.
Further bids may still arise as the situation continues to unfold. The next step would be a June 10 meeting in which shareholders would vote on approval of any bid that formally comes in.
Hipgnosis Songs Fund’s board of directors said on Monday that it would support a takeover bid from Blackstone if the private equity giant officially files its $1.5 billion offer for the music royalty fund. Blackstone said on Saturday (April 20) in what it called a “possible offer” that it was prepared to bid $1.24 per […]
Private equity giant Blackstone bid $1.5 billion to buy Hipgnosis Songs Fund on Saturday (April 20), marking a significant escalation in the fight for control of the troubled music royalty fund and its collection of rights to songs by Neil Young, Journey, Lindsey Buckingham, Blondie and others.
Blackstone is offering $1.24 per share in an all-cash offer that represents an 8.7% premium over the previous day’s closing share price, and is significantly higher than the $1.4 billion takeover bid that Nashville-based Concord Chorus made for the fund earlier this week.
Blackstone already owns two other entities under the Hipgnosis name — the private music assets investment fund Hipgnosis Songs Capital and the investment advisor Hipgnosis Song Management — and its bid on Saturday showed the private equity behemoth is willing to flex its muscle to maintain assets under the Hipgnosis umbrella.
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The five-year-old, London-listed Hipgnosis Songs Fund has cut its net asset value and shareholder dividends in recent months, as it struggled to address accounting errors and infighting between its board and investment manager that have angered investors already frustrated by an underwhelming stock price.
On Thursday (April 18), the board of directors announced in a filing with the London Stock Exchange that it had agreed to recomment a $1.402 billion proposed takeover bid from Concord to shareholders, which values each Hipgnosis share at £0.93 ($1.14). While the board said that institutional investors representing 30% of the fund’s outstanding shares were on board to vote in favor of the deal with Concord, it still needs shareholder approval from investors holding a total of 75% of shares.
Blackstone’s Hipgnosis Song Management, the investment adviser to the public fund and the private fund (Hipgnosis Songs Capital), has the right to outbid Concord and any other rival bidders to take the fund’s assets private, according to an option in its contract laid out when the fund went public in 2018.
The option was created with the sensitivities unique to music rights in mind. Hipgnosis Songs Fund was founded and built by Merck Mercuriadis, a longtime music executive and manager for artists like Elton John, Beyoncé and Guns N’ Roses. Mercuriadis used his relationships in the music industry to build the fund’s portfolio of rights to hit songs, and this option in the investment advisory contract was designed to give artists confidence that their catalogs would never trade hands — something that famously angered Taylor Swift.
However, since Hipgnosis Songs Fund investors served the board of directors the equivalent of a no-confidence vote last fall, this option has presented hurdles for the board in its effort to secure outside bids for the portfolio.
In its offer, which references Concord’s bid as $1.16 per share due to fluctuations in exchange rates, Blackstone said it “strongly encourages the board of Hipgnosis to recognise the significant increase in value available to all shareholders under the terms of its Fourth Proposal, over the $1.16 as set out in the Concord Offer, and to work with Blackstone to reach agreement on a unanimously recommended Firm Offer in an expeditious manner.”
Accounting scandals may not get the public’s attention like a raid by Homeland Security, but questions about the quality of a publicly traded company’s books is a serious matter. This week, an internal report made public by Hipgnosis Songs Fund, the London-listed company that played a major role in turning music rights into a stable, attractive asset class, confirmed what some analysts and shareholders had long suspected.
At best, the 26-page report by Shot Tower Capital, the firm hired by the company’s board of directors in the wake of a shareholder revolt in October, details how the investment advisor, the Merck Mercuriadis-led Hipgnosis Song Management (HSM), made numerous missteps in accounting and financial projections of its vast music rights portfolio that includes music by Red Hot Chili Peppers, Shakira and Journey. At worst, the report suggests the investment advisor chose accounting standards that overstated revenue, inflated the portfolio’s valuation and — as the board previously stated — resulted in larger fees paid for managing the portfolio. In any case, information released Thursday presents an unflattering portrait of HSM and its internal operations.
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For its part, HSM considers some “aspects of the report…to be factually inaccurate and misleading,” the company said in a statement on Thursday (Mar. 28). HSM said it received the report the evening before its release and will respond to the board “in due course.”
To be clear, Shot Tower did not explicitly comment on the investment advisor’s intent in using certain accounting practices. The data-heavy report offers analysis, not speculation. But the report, part of the board of directors’ effort to regain shareholders’ trust, made clear that annual revenue was “materially” overstated and laid out numerous examples where the fund’s numbers didn’t reflect the reality behind its assets.
Take, for example, something called right to income (RTI), which are royalties that are paid to the buyer at the close of an acquisition. (If the acquisition’s effective date is prior to the closing date, royalties received by the seller after the effective date are credited to the buyer.) Normally, the amount of the RTI is deducted from the purchase price and is not included in annual revenue figures. However, Shot Tower found that some RTI revenue from Hipgnosis acquisitions was counted as annual revenues rather than an adjustment in the purchase price. As the board’s Mar. 18 update noted, including RTI revenue with annual revenue amounts to “double counting.” Misclassifying RTI “significantly” increased the fund’s income in 2021 and 2022, according to the report. In fiscal 2019 and fiscal 2020, zero and 5.3% of deals had RTI periods that extended for more than one year. In fiscal 2021 and 2022, those numbers jumped to 43.9% and 60.0%.
RTI also came into play with the proposed sale of a portion of the portfolio to Hipgnosis Songs Capital, a joint venture of HSM and investment firm Blackstone. The catalog was presented to shareholders as having a net purchase price of $424.7 million (including RTI revenue of $15.3 million). With pro-forma annual revenue (PFAR) of $24.1 million, HSM assigned a 17.6x multiple to the proposed sale. But Shot Tower believes the catalog’s multiple should have been 14.9x based on higher annual revenue of $28 million and believed the net sale price should have been $416.7 million. Shareholders voted against the proposed sale in October.
In fiscal 2022, the investment advisor changed how it accounted for accrued revenues. The fund is required to make estimates on revenue earned in the period, rather than recognize revenue when the royalties are collected. A new approach, called “usage accruals,” calculated accruals “based on expected usage” rather than when revenues “are paid to, and processed by, collection societies, publishers and administrators.” Shot Tower noted the adoption of usage accruals occurred “at a time when RTI revenue was declining and the Fund could no longer raise capital for continued acquisitions.” In other words, a lack of fresh funding halted acquisitions and reduced the amount of RTI revenue added to annual revenue. Without the change, Shot Tower believes the fund “would have breached its lender covenants” and fiscal 2022 revenue would have been $36 million lower.
Accrued revenue also caused problems with PFAR, a non-IFRS metric meant to show investors organic growth excluding accruals and RTI. But Shot Tower found PFAR did indeed include accrual estimates of income expected to be included in the period, which “presents a picture of organic growth that is higher than growth suggested by the statement data,” according to the report. As such, Shot Tower warned investors not to rely on PFAR as a metric.
More issues arose in Shot Tower’s due diligence investigations into how individual catalogs were valued. The entire portfolio, which stood at $2.8 billion on Mar. 31, 2023, is instead worth $1.95 billion, according to the report — a difference of some $850 million. Given the transparency into the fund’s accounting practices, however, shareholders were unfazed by the demotion. On Thursday, Hipgnosis Song Fund’s share price jumped 8.3% to 69 pence, its highest closing price since Jan. 31 and 30.4% above its low point in 2024, 52.9 pence, set on Mar. 4. Whether the share price will improve further could depend on how shareholders view the board’s reaction to this report.
Hipgnosis Songs Fund, the troubled publicly traded music royalty company that owns full or partial rights to song catalogs from the Red Hot Chili Peppers, Shakira, Justin Bieber and Neil Young, issued a damning report Thursday (March 28) compiled by a third party that details missteps the fund and its investment advisor made leading to a 26% portfolio downgrade earlier this month.
The London-listed fund, which became the poster child for music as an investable asset class, cut the value of its portfolio earlier this month and told investors not to expect the resumption of dividends “for the foreseeable future” while the company focuses on paying down debts.
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Compiled by the board’s lead independent adviser, Shot Tower Capital, the report found that Hipgnosis Song Management, run by Hipgnosis founder and music manager Merck Mercuriadis, materially overstated the fund’s revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) and supported catalog acquisitions with financial analysis that failed to meet “music industry standards.” Hipgnosis Songs Fund itself overstated the scope of its music assets — the kinds of royalties and administration rights it owned and its share of those rights — in disclosures to investors and regulators. And in a pitch last September to investors to sell some 29 catalogs to a sister Hipgnosis company, the fund included a better-than-could-be-expected post-deal valuation, the report found.
In a statement announcing the report, the fund’s board said it is exploring “all options for the future of the company,” and that it will release its strategic review and proposals by April 26.
Hipgnosis Song Management said it was still reviewing the report, which it received late yesterday. “However, there are aspects of the report that HSM strongly disagrees with and considers to be factually inaccurate and misleading,” the company stated.
“Throughout the life of the company, HSM has worked constructively, and in good faith, with the company’s board and other advisers to deliver the best outcome for the company’s shareholders,” the company continued. “Each adviser was recruited by the company’s board to advise on their specific area of expertise and with clear areas of responsibility.”
Investors found heart in the report; at the close of London markets on Thursday, Hipgnosis Songs Fund was trading at 0.69 pounds ($0.87), up 8.3% on the day and 30.43% above its 52-week low of 0.53 pounds ($0.69) set on March 4.
Here are some of the most revealing findings from Shot Tower’s report:
“The Fund overpa(id) for the majority of the catalogs it acquired.”
Hipgnosis Songs Fund, at the investment adviser’s direction, famously paid top-dollar for music assets — more than $2.2 billion overall. Today, those assets are worth $1.948 billion, with 67 of 105 acquisition deals currently worth less than their purchase price.
The investment advisor’s “diligence and underwriting standards” are the reason why.
Hipgnosis Song Management predicted aggressive growth, but three-quarters of its catalogs missed those expectations “by an average of 23% annually” and the overall annual royalties the fund earned from catalogs has fallen to $121.6 million from $134.2 million.
“Passive catalogs grew significantly better than catalogs managed by the Investment Advisor.“
A significant portion of the rights the fund had in its portfolio included passive rights. However, Mercuriadis and Hipgnosis Songs Fund’s board frequently touted that their industry expertise would be a valuable tool to make these rights outperform passive catalogs.
“The fund’s public reports contain disclosures that imply greater ownership control over songs… than would have been the case.”
Multiple reports from the fund presented that it had 100% “interest ownership” in acquired catalogs, which suggests ownership and control. “In fact, a material number of catalogs represent only a fractional, non-controlling income stream in the compositions without any copyright ownership,” the report reads.
Despite promoting itself as a caretaker of artists’ and songwriters’ works, Mercuriadis’ investment advisory group “failed to invest in systems and provide the services required to effectively manage a catalog of 40,000+ songs generating +120 million of royalty income annually.”
Hipgnosis Songs Management has not tracked or managed the catalog at the song level, and its legal bookkeeping included numerous oversights and missing files that could present complications to the collection of royalties.
The report found “multiple areas where fund expenses appear unrelated to the fund and/or are excessive.”
These costly items included $1.5 to $2 million spent annually for awards shows and public relations, “including significant payments to multiple music industry periodicals”; $1.2 million in fees in 2023 from deals the fund ended up not doing; and $5.7 million in fees related to the abandoned deal to sell catalogs to its sister fund, Hipgnosis Songs Capital.
When the board of directors at Hipgnosis Songs Fund (HSF) cut the value of the company’s catalog by 26% last week, it admitted something investors had long believed. Although the London-listed royalty fund had amassed an enviable collection of songs since going public in 2018, changes in market conditions and the very nature of some of those rights may have merited a significantly lower fair value all along.
A new valuation by Shot Tower Capital put the portfolio of music rights — which includes Neil Young, Shakira and Red Hot Chili Peppers, among other A-list artists and songwriters — at $1.8 billion to $2.06 billion. As recently as Sept. 30, the catalog was given a fair value of $2.62 billion by HSF’s longtime valuation expert, Citrin Cooperman (previously Massarky Consulting). Six months earlier, it was said to be worth $2.8 billion.
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HSF’s new board of directors hired Shot Tower in the wake of investors’ Oct. 26 votes against continuation and a partial catalog sale — effectively a vote of no confidence in both the previous board and the investment advisor, Hipgnosis Song Management. Shot Tower will give HSF’s board its final due diligence by Mar. 25, and HSF will provide an update on those findings by Mar. 29.
Some longtime critics of HSF’s previous valuation found validation in Shot Tower’s lower number. Stifel analysts claimed the new number shows HSF “clearly overpaid for catalogs,” they wrote in a Mar. 4 investor note. To date, HSF has spent about $2.2 billion on acquisitions. It raised over 1.3 billion pounds ($1.67 billion) from an IPO and seven successive offerings and has drawn $604 million from a revolving credit facility.
Such a large decline in the valuation suggests the various experts had differing opinions on both the catalog’s revenues and the riskiness of those revenues. Shot Tower calculated HSF’s net revenue after third-party royalties and administration expenses at $121.7 million for the 12-month period ended June 30. The accounting firm BDO calculated a similar amount — $119.4 million for the 12-month period ended Sept. 30 — for a quality of earnings analysis.
The higher $2.62 billion valuation appears to be based on a higher annual net revenue. A July 2023 investor presentation put HSF’s annual revenue at $134 million (based on a $2.8 billion portfolio fair value and an implied historic net publishers share, or NPS, multiple of 20.89). That’s $12.3 million more than Shot Tower’s figure and $14 million more than BDO’s estimate. The difference in annual revenues, however, only explains part of the difference in valuations.
The discount rate appears to have also played a major role in HSF’s lower valuation. Shot Tower used a weighted average discount rate of 9.63% for the entire catalog, more than 1.1 percentage points higher than the discount rate used for previous valuations. Experts Billboard spoke with called the rate “on the high side” and “a particularly high number.” Some other recent valuations used a lower discount rate. Discount rates and valuations are inversely related: A higher discount rate will produce a lower present value of cash flows, and vice versa.
Until this week, HSF had been valued using an 8.5% discount rate since the Sept. 30, 2020, valuation conducted by Citrin Cooperman. FTI Consulting’s valuation of a Kobalt portfolio used in an asset-backed security (ABS) offering in February used an 8.5% discount rate for songs older than 18 months (and 11.75% for songs aged 3 to 18 months). FTI’s valuation of the portfolio behind Concord’s $1.65 billion ABS used an 8.25% discount rate for catalog songs (and 11.75% for recorded music frontline content and options for future releases).
The HSF discount rate has been a point of contention amongst analysts and investors in recent years. When HSF lowered its discount rate to 8.5% in 2020, analysts complained the valuation increased even though the investment manager had not yet added value and market assumptions hadn’t changed. When interest rates started rising in 2022, analysts wondered why HSF stuck with the 8.5% discount rate.
The discount rate depends on the riskiness of those future cash flows. Perfectly safe revenue is discounted using a risk-free rate of return such as a 10-year U.S. Treasury Rate. Because no business is without risk, a company’s revenues would merit a higher rate. If a company carries debt, its borrowing cost — also more than the risk-free rate — would also be baked into the discount rate.
Shot Tower’s discount rate took a variety of factors into account, according to the press release, which could explain how it got to 9.63%. For example, Shot Tower found that 65% of HSF’s revenue derived from passive rights where the company does not control publishing, administration or licensing. In many cases, HSF owns only a songwriter’s share rather than the publisher’s share, or the producer’s royalties from a sound recording. Investors might have assumed that HSF had more control over administration, distribution and licensing: In HSF’s annual report for the year ended March 31, 2022, it said it had 100% interest ownership in 96% of the songs in its catalog (138 of the 146 catalogs).
“That control has a lot of value,” explains an industry insider. Strategic buyers — usually music publishers and record labels — will pay a premium to control a song’s administration and licensing or a recording’s distribution. Passive rights typically trade at a discount because they carry more potential risks of counterparts (co-writers, for example) and potential collection risk (as is the case when royalties are re-directed from a label rather than received from a PRO). With a writer’s share, “you’re a lot more along for the ride,” this insider says. The producer royalties that HSF acquired — such as RedOne, Jimmy Iovine and Timbaland — are also passive.
For a company looking to bolster its credibility with investors, Shot Tower’s valuation was a double-edged sword. The lower number confirmed some investors’ long-held belief that the portfolio is worth less than HSF had claimed. But the decrease in valuation further hurt HSF’s share price. Shot Tower’s lower valuation prompted HSF’s board to commit to using its cash to pay down debt rather than resume the dividend it suspended in October. So, while the lower valuation better reflected HSF’s market capitalization, the continued loss of a dividend was the likely cause behind the stock dropping 11% the day of the announcement.
LONDON — Hipgnosis Songs Fund has cut the value of its portfolio by more than a quarter and told investors that it does not intend to recommence paying dividends “for the foreseeable future” as it focuses on paying down debts.
The London-listed fund, which owns full or partial rights to the song catalogs of Red Hot Chili Peppers, Neil Young, Justin Bieber and Blondie, among many others, announced the updated valuation on Monday (March 4).
It follows a detailed review of the company’s portfolio “on a bottom-up basis” by Shot Tower, which was appointed following a public fallout between the firm’s board and its investment advisor, the Merck Mercuriadis-led Hipgnosis Song Management (HSM), over the fund’s worth.
In a financial filing, Hipgnosis Songs Fund (HSF) said Shot Tower’s preliminary report estimates the fair market value of the company’s portfolio at between $1.8 billion and $2.06 billion (and $1.74 billion and $2 billion after deducting contingent catalog bonuses of just under $60 million).
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Shot Tower gave a midpoint valuation of $1.93 billion, reflecting a multiple of 15.9x net royalty income, which is around 26% lower than the valuation of September 2023.
Hipgnosis Songs Fund said the new valuation was based on a range of criteria, including whether a catalog was made up of publisher, writer, producer or artist’s share of rights royalties. Shot Tower’s report also took into account royalty income streams and administration rights or copyrights due to be returned to the firm in future years, the fund said.
The firm’s cash net revenue (after third party royalty reductions and administration expenses) was $121.7 million for the 12-month royalty statement period ended June 30, 2023, according to Shot Tower’s analysis.
When adjusted solely for the new valuation, the company’s operative net asset value would be approximately $1.17 (92p) per share, compared to the last reported net asset value of $1.7392 (137p) per share at the end of September, the firm reported.
As a result of the decrease, the board said that it would be using free cashflow to pay down debt “and, therefore, does not intend to recommence paying dividends for the foreseeable future.”
In a statement accompanying the filing, Hipgnosis Songs Fund chairman Robert Naylor said the company’s newly constituted board “is making good progress with the due diligence work” underpinning its ongoing strategic review and that the board “remains focused on identifying all options to deliver shareholder value.”
Hipgnosis Songs Fund’s share price initially fell by 11% to £0.56 on Monday morning following the news.
The slashed valuation represents another blow for HSF, which underwent a turbulent end to 2023 and just-as-rocky start to the year.
In October, shareholders voted against the music royalties fund’s proposed $440 million deal to sell 29 catalogues to Hipgnosis Songs Capital – a partnership between investment giant Blackstone and the fund’s investment adviser Hipgnosis Song Management – citing the lack of an “up-to-date” valuation.
The same month’s annual meeting of shareholders also saw a majority of investors vote against a resolution “to continue running the fund in its current form” — a so-called “continuation vote” — commencing a six-month countdown for the board to come up with a plan “for the reconstruction, reorganisation, or winding-up of the company.”
That led to the installation of a new executive board with Naylor replacing Andrew Sutch as chairman, while last month shareholders passed a special resolution that authorizes the payment of up to 20 million pounds ($25 million) to prospective bidders seeking to acquire the fund’s assets. The fund hopes that the enticement of a large fee will help draw potential bidders to acquire some of the company’s catalogs.
February also saw Mercuriadis step down as chief executive officer of Hipgnosis Song Management to take up a newly created chairman role with Ben Katovsky replacing him as CEO.
Shot Tower is due to present its final due diligence findings to the firm’s board later this month.
