Hipgnosis Songs Fund
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Hipgnosis Songs Fund capped off an eventful 2023 by lowering the value of its music catalog amidst internal conflict over exactly what the company’s star-studded catalog is worth.
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The publicly listed royalty fund said its operative net asset value per share declined 9.2% to $1.74 on Sept. 30 from $1.92 on March 31, according to its half-year earnings report on Thursday (Dec. 21). The sharp decline stemmed primarily from a “material reduction” in expectations for CRB III and CRB IV income.
The company’s self-reported valuation has long exceeded the value implied by its share price and estimates of equity analysts. In recent months, Hipgnosis Songs Fund has proposed and completed partial catalog sales at discounts to their net asset values.
New board chair Robert Naylor‘s statement to investors described a strained relationship with the fund’s investment advisor, the Merck Mercuriadis-led Hipgnosis Song Management, over the valuation of the five-year-old company’s catalog that includes stakes in songs by Neil Young, Journey and Fleetwood Mac.
Two days earlier, the board postponed the release of half-year earnings after the investment advisor produced a “heavily caveated” opinion on the catalog valuation provided by independent firm Citrin Cooperman that was “materially higher than the valuation implied by proposed and recent transactions in the sector.”
Internal conflicts continued while the results were delayed. According to Naylor, the board’s request of Hipgnosis Song Management about “the matter to be published on the Company’s website in order to provide transparency for shareholders” was rebuffed “under the confidentiality clauses of the Investment Advisory Agreement.”
On Thursday, Naylor urged Hipgnosis Songs Management to provide an opinion on the valuation of Hipgnosis Songs Fund “without caveats” to provide greater transparency to shareholders. In the absence of a caveat-free opinion, the board urged investors to use “a higher degree of caution and less certainty” than normal when considering its fair value and operative NAV.
Hipgnosis Songs Fund shares fell 1% to 0.70 GBP on Thursday.
Gross revenue from continuing operations declined 26.9% to $63.2 million from $86.4 million in the six-month period ended March 31, 2023.
Net revenue from continuing operations declined 29.7% to $54 million from $76.8 million. About half of the decline came from a $11.9 million reversal of accrued royalties in October. Excluding those accrued revenues, net revenue grew 14% to $65.8 million.
Pro-forma annual revenue (PFAR), which measures gross royalties received and excludes revenue accruals, grew 10.4% to $64.9 million.
Following shareholders’ vote against continuation at the annual general meeting on Oct. 26, Hipgnosis Songs Fund transformed its board of directors by naming Naylor to succeed Andrew Sutch as chairman and adding Francis Keeling, a former Universal Music Group executive, and Christopher Mills, CEO and investment manager at North Atlantic Smaller Companies Investment Trust, to replace Andrew Wilkinson and Paul Burger, both of whom left prior to the annual general meeting.
The new board undertook a strategic review and named Shot Tower Capital as lead advisor to conduct due diligence on the catalog. On Thursday, Naylor said he was pleased with the strategic review’s progress thus far. “This process will help the new Board bring forward proposals for delivering value to shareholders,” said Naylor.
But Naylor also described “ongoing failures in the financial reporting and control process” since he joined the board. “Whilst we consider substantial progress has been made in identifying and rectifying these issues,” Naylor added, “we have had to suspend the dividend for at least the remainder of the year in order to ensure compliance with our banking covenants.”
Just one day after announcing a delay in publishing interim financial results for the six months ended Sept. 30, Hipgnosis Songs Fund has announced the appointment of a new auditor.
In a press release on Wednesday (Dec. 20), the Merck Mercuriadis-led company said it had appointed KPMG Channel Islands Limited as its new auditor, “with immediate effect for the financial year ended” Mar. 31, 2024. KPMG succeeds PricewaterhouseCoopers (PwC) in the role.
The release notes that the appointment of KPMG will be subject to approval by the company’s shareholders at a general meeting “to be convened in due course.”
“The previous auditor, PwC CI, has deposited with the Company a statement confirming that there are no matters to be brought to the attention of the Company’s members or creditors,” the release adds.
On Tuesday, Hipgnosis Songs Fund said it would delay publishing its financial results over concerns about its valuation, explaining that the valuation it received from an independent firm was “materially higher than the valuation implied by proposed and recent transactions in the sector.” These transactions include the proposed $417.5 million sale of 29 catalogs to Blackstone-backed Hipgnosis Songs Capital — a price reflecting a 24.3% discount from a valuation dated March 31 — and last week’s sale of 20,000 “non-core songs” to an undisclosed buyer for $23.1 million, which the company said reflects a 14.2% discount on the songs’ valuation as of early fall.
Hipgnosis Songs Fund now expects to announce its financial results on New Year’s Eve, according to the regulatory filing.
Hipgnosis is composed of three companies: Hipgnosis Song Management, Hipgnosis Songs Capital and Hipgnosis Songs Fund, the latter of which has been the subject of controversy for months. On Oct. 16, the London-listed trust revealed that it would not pay its investors a dividend due to new, lower revenue projections. On Oct. 26, more than 80% of the fund’s investors demanded structural changes to the music rights company, voting in favor of the board drawing up “proposals for the reconstruction, reorganization or winding-up of the company to shareholders for their approval within six months.”
Last month, it was also announced that the fund will not declare dividends before the fiscal year, which begins in April, to ensure it has enough on its ledger to pay contractually mandated catalog bonuses.
Hipgnosis Songs Fund owns full or partial rights to the song catalogs of artists including Justin Bieber, Neil Young, Bruno Mars, Jimmy Iovine, 50 Cent, Shakira, Blondie, Justin Timberlake and Lindsey Buckingham.
Hipgnosis Songs Fund ended the day up 1.43% on the London Stock Exchange following the announcement of the new auditor.
Hipgnosis Songs Fund has announced a last-second delay in publishing interim results for the six months ended Sept. 30, citing concerns over its valuation following a series of hiccups for the Merck Mercuriadis-led company.
The fund, which owns full or partial rights to the song catalogs of artists ranging from Justin Bieber, Neil Young, Bruno Mars, Jimmy Iovine, 50 Cent, Shakira, Blondie, Justin Timberlake, Lindsey Buckingham and many more, was scheduled to publish it financial results on Tuesday (Dec. 19) but now expects to announce on New Year’s Eve, according to a regulatory filing.
In explaining the delay, the Hipgnosis board said the valuation it received from an independent firm was “materially higher than the valuation implied by proposed and recent transactions in the sector,” namely two deals involving itself: a proposed $417.5 million sale of 29 catalogs to Blackstone-backed Hipgnosis Songs Capital, a price reflecting a 24.3% discount from a valuation dated March 31, and last week’s sale of 20,000 “non-core songs” to an undisclosed buyer for $23.1 million, which it said reflects a 14.2% discount on the songs’ valuation as of early fall.
Due to the disparity between the independent valuation and the “implied” one tied to recent trends and proposed sales, the board sought advice from its in-house investment advisor, Hipgnosis Song Management Limited, which delivered a “heavily caveated” opinion that led to the board’s concerns as to the valuation of HSF listed in the interim results scheduled to be disclosed today.
Hipgnosis is comprised of three companies: Hipgnosis Song Management, Hipgnosis Songs Capital and Hipgnosis Songs Fund. The latter of the three has been mired in controversy in recent months after it was announced that the London-listed trust would not pay its investors a dividend because of new, lower projections for revenue. On Oct. 26, investors of the fund overwhelmingly demanded structural changes to the music rights company, with more than 80% of Hipgnosis investors voting in favor of the board drawing up “proposals for the reconstruction, reorganization or winding-up of the company to shareholders for their approval within six months.”
Last month the company announced that the fund will not declare dividends before the new fiscal year, which begins next April, in order to ensure it has enough on its balance sheet to pay contractually-mandated catalog bonuses.
Investors are still processing the news, with the company’s stock only slightly down, roughly 2%, in mid-day trading on the London Stock Exchange.
Hipgnosis Songs Fund has found a buyer for a batch of “non-core songs” that have been up for sale since earlier this fall. In a filing Monday with the London Stock Exchange, where it is listed, HSF announced the sale of 20,000 tracks for $23.1 million, which it said reflects a 14.2% discount on the songs’ valuation as of late September.
The company said the sale of the songs, acquired in 2020 from Kobalt, is expected to net $22.6 million, which will be used to pay down a revolving credit facility and provide “greater headroom under its future covenant compliance reporting.” The buyer or buyers were not disclosed. The sale price represents a multiple of 9.6x net publisher share, according to a statement, and makes up approximately 1% of HSF’s investment portfolio value.
The specifics of these “non-core” songs have also not been disclosed. When the proposed sale was announced in September, the company’s board said the songs “require ongoing accounting and reporting obligations that take up significant bandwidth which can be better focused on active song management.”
Hipgnosis is comprised of three companies: Hipgnosis Song Management, Hipgnosis Songs Capital and Hipgnosis Songs Fund. The latter of the three has been mired in controversy in recent months after it was announced that the London-listed trust would not pay its investors a dividend because of new, lower projections for revenue.
On Oct. 26, investors of the fund overwhelmingly demanded structural changes to the music rights company, with more than 80% of Hipgnosis investors voting in favor of the board drawing up “proposals for the reconstruction, reorganization or winding-up of the company to shareholders for their approval within six months.”
Last month the company announced that the fund will not declare dividends before the new fiscal year, which begins next April, in order to ensure it has enough on its balance sheet to pay contractually-mandated catalog bonuses.
In its latest filing announcing the sale of unspecified songs, HSF also said it had appointed Singer Capital Markets as sole corporate broker and financial adviser, and Shot Tower Capital as lead adviser of the company’s strategic review.
Hipgnosis Songs Fund announced on Tuesday the appointment of Rob Naylor as board chair, replacing Andrew Sutch, who was removed as part of changes set in motion at last month’s shareholders meeting.
Naylor had been a top candidate, as Billboard sources indicated, and arrives at HSF following a tenure as board chair at Round Hill Music Royalty Fund, the public fund of Round Hill, which was recently sold to Concord as part of a $469 million sale. He is CEO of Intuitive Investments Group, a fund that invests in high growth life sciences companies, and held previous roles at JP Morgan Asset Management Limited, Panmure Gordon Limited and others.
Joining the board as a non-executive director is Francis Keeling, who held the same title at Round Hill Music Royalty Fund Limited until its recent sale. Keeling is currently executive vp of business development at Orfium, a rights management solutions company. A music industry veteran, he was previously global head of licensing at Spotify and before that, global head of digital business at Universal Music Group.
“On behalf of the Board, we are delighted that Robert and Francis have agreed to join Hipgnosis Songs Fund,” said Sylvia Coleman, senior independent director of HSF. “Robert and Francis’s appointments follow extensive engagement with shareholders, and their experience and knowledge working with investment companies, most notably at Round Hill Music Fund, will be invaluable to Hipgnosis as we look ahead to the next chapter.”
On Oct. 26, investors of the fund overwhelmingly demanded structural changes to the troubled music rights company — but in ways that don’t include selling off part of its 65,000-song catalog. More than 80% of Hipgnosis investors voted in favor of the board drawing up “proposals for the reconstruction, reorganization or winding-up of the company to shareholders for their approval within six months,” the board said in a regulatory filing.
Investors also voted 71.5% against the re-election of Sutch, then-board chair, speeding up his departure, which was already set for 2024. Fund directors Andrew Wilkinson and Paul Burger also resigned as part of strategic review of its leadership.
In emailed comment following the shareholders meeting, founder Merck Mercuriadis framed the vote as “an opportunity to reset and focus on the future.”
Investors want serious, swift changes to make Hipgnosis Songs Fund more profitable and stable. That was the key takeaway from more than 80% of investors’ votes last week on how the London-listed trust that owns rights to songs by Journey, Bruno Mars and Rihanna should proceed. While the landslide vote opened the door to possibly winding up the pioneering publicly traded music royalty trust, it doesn’t spell an immediate end — more like the long beginning of company-wide rethink to improve the company’s stock price.
More than 80% of Hipgnosis investors voted in favor of the board drawing up “proposals for the reconstruction, reorganization or winding-up of the company to shareholders for their approval within six months,” the board said in a regulatory filing.
“These proposals may or may not involve … liquidating all or part of the company’s existing portfolio of investments.” Adding further uncertainty to the fund’s future is that, while its board devises a plan to restore regular dividends and boost a lagging share price, it must simultaneously find replacements for its chair, Andrew Sutch, and two other members, after those three either resigned or failed to win re-election to the board seats last week.
Sources say Round Hill Music Royalty Fund’s outgoing board chair, Rob Naylor, is being considered to chair of Hipgnosis Songs Fund’s board. Naylor is a former London banker and currently the chief executive officer of Intuitive Investments Group, a fund that invests in high growth life sciences companies. Naylor would have been closely involved in negotiating Round Hill’s $469 million sale of its public fund to Concord, which shareholders approved in mid-October and closed this week.
Jefferies analyst Matthew Hose says one route the board might take would be similar to Round Hill’s sale — Hipgnosis Songs Fund could sell itself to its sister fund Hipgnosis Songs Capital, which is jointly run by Mercuriadis’ investment advisor Hipgnosis Song Management and private equity goliath Blackstone, or it could sell itself just to Mercuriadis’ investment advisor Hipgnosis Song Management.
Although investors soured on an earlier plan to sell about 20% of the Hipgnosis Songs Fund to Hipgnosis Songs Capital, with Blackstone’s backing it remains among the most capable buyers and it knows the portfolio of songs well, analysts agree. There’s also a clause in the investment advisory group’s contract that says if the public fund ends its contract with investment advisor, the investment advisor can buy out the fund. The clause, which was laid out in the fund’s 2018 filings when it went public, was intended to help Mercuriadis reassure artists whose catalogs Hipgnosis acquired that he would always stay on as the relationship manager in charge of their songs and legacy.
While Hose says a sale to Mercuriadis and the investment manager could benefit all parties, “the question is whether this board is able to propose an ‘open’ sale process for the portfolio that extracts this fair value for shareholders, while still honoring the manager’s option, or will the existence of the option simply prohibit any realistic bids?”
Analysts who cover investment trusts like Hipgnosis Songs Fund say that about 80% of the time following a no continuation vote, a fund winds up, either through selling its assets to multiple buyers or all of the portfolio to a single buyer and then distributing those proceeds to shareholders minus any debt repayments.
The deliberation over which direction to take the fund will also rely on an updated valuation of the portfolio, which Hose says will likely see a downgrade since the disclosure in October that the fund’s valuers had inaccurately estimated certain CRB III royalty funds.
“We see the potential for weakness in the portfolio,” Hose says. “An independent valuation of the portfolio by a new valuer that gains the trust of the market … could be crucial here.”
Investors in Hipgnosis Songs Fund on Thursday overwhelmingly demanded a new board make structural changes to the troubled music rights company in ways that don’t include selling off part of its 65,000-song catalog, which includes compositions by Neil Young, Shakira and the Red Hot Chili Peppers.
At the company’s annual meeting of shareholders in London, a majority of investors voted no on a resolution “to continue running the fund in its current form”–what’s known as a continuation vote — and they rejected a plan to sell a package of 29 song catalogs to Hipgnosis’ Blackstone-backed sister fund, according to the fund.
The ‘no’ vote signals unequivocal shareholder anger with the company founded by Merck Mercuriadis, and it kicks off a 6-month countdown for the board to come up with a plan “for the reconstruction, reorganisation, or winding-up of the company,” possibly “liquidating all or part of the company’s existing porfolio of investments,” according to the board’s statement.
“While shareholders have not supported our proposed transaction or the continuation vote, it is clear that they share our belief in the inherent quality and potential of these assets,” Sylvia Coleman, senior independent director of Hipgnosis Songs Fund said in an emailed statement. “Directors are now expediting the appointment of a new chair who will drive the strategic review we have already announced, with a clear focus on delivering improved shareholder value.”
Investors voted against the re-election of Hipgnosis Songs Fund board Chair Andrew Sutch at the meeting, speeding up the timetable for his departure. Sutch had already announced he would step down before the company’s next annual general meeting in 2024. On Wednesday, the day before the company’s annual meeting, fund directors Andrew Wilkinson and Paul Burger resigned, and last week, the board embarked on a strategic review into the company’s management team.
“Shareholders have spoken and sent a clear message that the status quo is unacceptable and that a total reset is required,” Tom Treanor, the head of research at Asset Value Investors, which owns a roughly 5% stake in the fund, said in an email. “We look forward to a refreshed board working closely with shareholders to turn the company around.”
Mercuriadis, the former manager of Elton John and Guns N’ Roses, will continue as Hipgnosis Songs Fund’s investment advisor. Mercuriadis founded Hipgnosis in 2017 and took it public on the London Stock Exchange (LSE) in July 2018.
Hipgnosis Songs Fund’s share price rose 1.2% to 75.90 British pence ($0.92) at 11:20 in London.
Thursday could be a pivotal moment in the history of Hipgnosis Songs Fund, which went public in 2018, raising $260 million, and helped legitimize song catalogs as an investment vehicle. At 10 am, shareholders will gather at United House, a stylish workspace in London’s Notting Hill neighborhood, to vote on the continuation of the publicly listed investment trust – essentially, whether to continue or wind down the fund – and a $440 million catalog sale meant to improve its struggling share price.
All signs point to shareholders rejecting both the continuation and the proposed sale of song catalogs to Hipgnosis’ Blackstone-backed sister fund. A failure of the continuation vote isn’t an immediate death knell for the fund – the board will have six months to present investors with a plan to right the ship – but it will never be the same.
If the continuation vote fails, Merck Mercuriadis, the former Elton John and Guns N’ Roses manager who founded the company and became its often provocative public face, will probably continue as the public fund’s investment advisor. But he will be working with a different board of directors at Hipgnosis Songs Fund after two directors, Andrew Wilkinson and Paul Burger, resigned on Wednesday (Oct. 25) and the board’s chair Andrew Sutch signaled he will leave before the next annual meeting. The resulting changes will likely mean more scrutiny over Mercuriadis’ management of its 65,000-song catalog, which includes compositions by Neil Young, Shakira and the Red Hot Chili Peppers.
Mercuriadis has already conceded some ground by accepting a reduced fee for managing the fund’s portfolio if the catalog sale goes through. But Mercuriadis still has the backing of the current board, plus the confidence of many shareholders. “Despite the fact that there’s lots of commentary around governance, conflicts of interest, value achieved, we see no criticism at all for Hipgnosis [Song Management] to actually do its job of managing the portfolio,” says Shavar Halberstadt, a London-based investment trusts analyst at Winterflood Investment Trusts.
As other shareholders see it, Hipgnosis Songs Fund has committed a string of unforced errors that has undercut investors’ confidence in its leadership. “I think all trust left the building, quite frankly, a while ago,” says Stifel analyst Sachin Saggar. “I have not spoken to an investor at this point — and I’ve spoken to quite a few — where any of them have any sense of confidence, trust in the current board, or the [investment] manager, frankly.”
Last week, Hipgnosis Songs Fund canceled an upcoming dividend payment to keep from breaching a debt covenant. According to the board of directors, the decision came after the independent portfolio valuer, Citrin Cooperman, cut its estimate for a retroactive royalty payment related to the Copyright Royalty Board’s decision to raise publishers’ royalty rates from subscription streaming services for the period 2018 to 2022. It wasn’t the first time: In 2021, Hipgnosis Songs Fund committed what it termed an “inadvertent breach” of a credit facility restriction.
Another blow to shareholders’ trust in the board came in 2022 when Hipgnosis Songs Fund refinanced its revolving credit facility to reduce its interest margin and provide greater financial flexibility. Many other companies refinanced debt in 2020 and 2021 to take advantage of low interest rates in the early days of the pandemic. “They waited too long and then the process took very long,” says Halberstadt.
More recently, Hipgnosis Songs Fund’s steps to address its flagging share price have attracted criticism. In September, the company announced a plan to raise $465 million by selling two catalogs — one with a $440 million deal with Hipgnosis Songs Capital, a joint venture of the public fund’s investment advisor and the investment giant Blackstone. If the sale is approved, the proceeds will fund debt reduction and share buybacks to reduce the 60% gap between the current share price and the company’s per-share net asset value (the valuation of its catalog of music rights). But sources tell Billboard that investors will likely vote no to the deal on Thursday.
With the sale price 17.5% below the catalog’s latest valuation, shareholders questioned whether the Blackstone-backed entity was getting a favorable deal, as well as if the process for soliciting other bids was transparent enough. Hipgnosis Songs Fund’s board said at the time that it created “appropriate governance arrangements and information barriers” to properly conduct a sale between two related parties.
The fund’s board said on Tuesday it received one outside offer after talks with 17 prospective buyers, but that ultimately the external parties said “they could not justify” a higher offer price than the $440 million offered by Hipgnosis Songs Capital.
“The shareholders are very upset with the capital stance, the dividend cut, the strategic review, and the related party transaction, and they are highly likely to vote against continuation on Thursday,” predicts Matthew Hose, a London-based analyst for Jeffries. Analysts at Investec encouraged shareholders to vote against both continuation “in order to reinforce the point that the status quo is not an option,” they wrote in an Oct. 19 note to investors. Alternative Value Investors Limited, which owns a 5% stake in Hipgnosis Songs Fund, also encouraged other shareholders to vote against both continuation and the catalog sale in an Oct. 16 letter.
If the continuation vote fails, the board has six months to create a proposal “for the reconstruction, reorganization or winding-up” of the fund, according to its prospectus. “If shareholders vote against continuation on Thursday, it’s almost like it’s the end of the beginning, not the beginning of the end,” says Hose. AVI spoke to “a majority” of shareholders and found none are in favor of an immediate portfolio sale, wrote AVI head of research Tom Treanor.
Despite their frustration, Hipgnosis Songs Fund’s investors aren’t looking for a nuclear option. Rather, shareholders want new leadership on the board and an orderly process, says Saggar. “Nobody is looking at blowing this up. Nobody is looking to do this in a nonsensical way.” AVI emphasized this point in an attempt to sway undecided shareholders. “Voting against continuation should not be perceived as a negative stance to take,” wrote Treanor.
Even if shareholders eventually push to wind down Hipgnosis Songs Fund, there are questions about what amount the catalog could fetch for shareholders. While Hipgnosis Songs Fund has reported that its portfolio is valued at $2.8 billion, sources tell Billboard that its lenders likely value it closer to $1.8 billion, or what banks estimate they could get for the assets in a distressed sale. Two sources tell Billboard they predict the portfolio’s value to be somewhere between those two numbers.
To appease shareholders ahead of the vote, changes to Hipgnosis Songs Fund’s governance are already underway. The board recently hired an executive search firm to aid in finding Sutch’s replacement on the board, and Wilkinson and Berger’s resignations are effective immediately. The board intends to appoint Cindy Rampersaud, an independent non-executive director, to replace Wilkinson as chair of the audit and risk management committees.
In exchange for voting yes to continue the fund, the board has also offered shareholders the right to vote on continuation again in 2026 and 2028, giving them more opportunities to push for change than the standard five-year window between continuation votes typical of U.K. investment trusts. Also, Hipgnosis Songs Fund says it will terminate the investment advisor’s contract if the share price’s discount to NAV is 10% or more for the month of January 2025. Given the current share price — Hipgnosis Songs Fund shares are current trading at 60% below NAV — that could mean the investment advisor receives a 12-month notice in fewer than 15 months from now.
But getting rid of Mercuriadis would create challenges that shareholders might want to avoid. If Mercuriadis departs and Hipgnosis Songs Management is unable to find a replacement satisfactory to the public company’s lenders within 90 days, Hipgnosis Songs Fund would be in default and lenders may demand repayment of all amounts in the revolving credit facility, according to the company’s prospectus. Also, Hipgnosis Songs Management retains an option to acquire Hipgnosis Songs Fund’s portfolio if its investment advisory contract is canceled. When the board initiated a strategic review last week — another move to appease shareholders ahead of the annual meeting — it asked Hipgnosis Songs Management to remove the clause from its contract but was rebuffed. The option to purchase could be problematic for investors who want to maximize bids on the catalog.
“If you didn’t have that option, you could run an open sales process,” says Hose. “Will that option prevent others from bidding?”
Hipgnosis Songs Fund was initially pitched to investors as a source of reliable returns from classic, successful songs during a streaming-led boom in royalties, the Guernsey-based company monetizes proven song catalog and pays dividends. That catalog is seen as the company’s biggest strength and holds more opportunity as streaming expands globally and music businesses explore new ways to monetize their catalogs. But all signs point to shareholders needing more trust in how Hipgnosis Songs Fund is governed.
“The company has a bright future,” writes AVI’s Treanor. “And that may well be with the current manager on revised terms should a new board decide so following consultations with shareholders. But we do, however, strongly believe that a reset is urgently required.”
Rarely does an accounting issue move markets and surprise people throughout the music business. But that’s what happened Monday when Hipgnosis Songs Fund, the publicly traded investment trust backed by the catalogs of such artists as Neil Young and Stevie Nicks, announced it will cancel a planned quarterly dividend payment to shareholders.
According to Hipgnosis Songs Fund’s board of directors, the decision was the result of the company’s independent valuation expert, Citrin Cooperman, reducing its expectations of “industry-wide” retroactive payments from the Copyright Royalty Board’s Phonorecords III (a.k.a. CRB III) ruling that increased the royalties music publishers receive from on-demand music streaming services for the years 2018 to 2022. Billboard estimated that the music industry would gain over $250 million in total, and another industry expert recently told Billboard they estimated the industry-wide retroactive payment will approach $400 million.
Hipgnosis’ adjustment was substantial: down roughly 54% from $21.7 million to $9.9 million. Meanwhile, Billboard continues to stand by its previous estimate and no other publishers or rights funds that spoke for this story have had to decrease their projections.
“Frankly, I’m shocked… I really do not understand this,” says one music publishing executive.
Multiple sources say there have been no new updates regarding CRB III in recent weeks that would cause a publisher to cut their expectations for accruals by more than half, and it must be an accounting error unique to Hipgnosis and Citrin Cooperman. “None of the data points have changed,” explains another publishing executive. “The ruling is what it is, so they must’ve made a mistake here.” Citrin Cooperman did not respond to Billboard’s request for comment.
The fallout Monday was immediate: With the sudden change in expected retroactive royalties, Hipgnosis Songs Fund was forced to cancel a dividend payment to not risk violating the debt covenants for its $700 million revolving credit facility. That dividend — 1.3125 pence per ordinary share — was announced on Sept. 21 and was to have a payment date of Oct. 27. The company’s share price dropped 10% on Monday’s news. Dividends are an integral component to the fund’s strategy of providing investors with stable returns from proven, successful music catalogs. Since its initial public offering in July 2018 through March, Hipgnosis Songs Fund had declared dividends of 21.6 pence per share, according to the latest annual report.
While the retroactive CRB III payments would be less than Hipgnosis Songs Fund expected and impacted a dividend payment this quarter, the resulting cash crunch likely won’t happen until 2024. Streaming royalties due for the period 2018 to 2020 will be paid directly to rights holders, with everything after that flowing through the Music Licensing Collective with a Feb. 9, 2024, deadline. Most of the adjustment will come from the 2021-2022 royalties owed to the MLC, according to sources. Considering the time it will take the MLC process the distributions, publishers probably won’t receive this tranche of royalties until the spring 2024.
In August, the Copyright Royalty Board stated its final determination for how songwriters and publishers would be paid for the period of 2018-2022. These rates were hotly contested between the music business and streaming services over the past six years. Though rates were nearly finalized in 2018, some streamers remanded it back to the CRB in 2019 in hopes of getting more favorable terms. In the meantime, the streaming services paid songwriters and publishers under the guidelines set by the previous period, Phonorecords II, which was lower than what was ultimately set for 2018-2022.
Ever since, the music business has been preparing for when the 2018-2022 rates would finally be settled, and streaming services would have to undergo a massive recalibration of what they had previously paid out. When the judges released their final determination in mid-August, it proved that these streaming rates overall would lead to more money for publishers and songwriters.
Other publicly traded publishing companies have also announced the amounts of their expected adjustments ahead of receiving the money. Universal Music Group-owned Universal Music Publishing Group, one of the world’s largest music publishers, expects to book a catch-up adjustment of nearly 30 million euros in the third quarter of 2023 related to Phonorecords III, UMG said in its July 26 earnings call. Warner Music Group, which often ranks as the third largest publisher, according to Billboard’s Publishers Quarterly, recognized a benefit of $20 million — less than the amount of Hipgnosis Songs Fund’s initial estimate — in the quarter ended Sept. 30, 2022, resulting from the CRB’s ruling July 1, 2022, ruling.
Reservoir Media accrued less than $3 million in royalties in the third and fourth quarters of calendar 2022 related to the CRB III decision, says CEO Golnar Khosrowshahi. Reservoir Media doesn’t expect to adjust the size of the CRB III adjustment. “We continue to believe our estimates are accurate,” says Khosrowshahi. “We’ve applied an appropriate level of conservatism in recording that revenue.”
The amount of the expected windfall appears to have received a great deal of consideration inside Hipgnosis Songs Fund. According to Hipgnosis Songs Fund’s latest annual report, the company compared the Phonorecords III accrual estimates to estimates provided by the independent valuer — Citron Cooperman — as well as the fair-value appraiser for the City National Bank-led revolving credit facility. The 182-page report mentions the term “CRB III” 49 times and includes lengthy discussions of the company’s regulatory environment and how the CRB III determination raised the headline royalty rate due to music publishers by 44% from 10.5% to 15.1%.
CRB III will give publishers less than a 44% rate increase, though. The amount owed to music publishers is a complicated formula that includes minimum per-subscriber fees and percentage-of-revenue calculations. Publishers typically received above the headline rate from streaming services from 2018 to 2022, meaning extra amounts owed retroactively will be less than they would otherwise. Sources tell Billboard the effective rate for some streaming services was in the range of 12% to 13% of service revenue rather than 10.5%.
Hipgnosis did not respond to Billboard’s request for comment.
Will Hipgnosis Songs Fund, a trailblazer in making music an alternative asset class in the financial world, fight to see another day? The sale of catalogs for $465 million, announced Thursday, is meant to help Hipgnosis Song Fund’s sagging share price and bring it closer to the company’s per-share net asset value (NAV). But it also intends to give investors a reason to vote for a five-year continuation in the annual meeting that’s likely to be held in October.
Given its need to shore up investor support, the catalog sale didn’t come as a surprise. Board chair Andrew Sutch said at a July 13 investor presentation that the board was pursuing options to boost shareholder value, and Hipgnosis has said that many of its largest shareholders favor share buybacks and partial debt repayment to help the struggling share price. This transaction provides the capital for those measures: Hipgnosis intends to use $180 million for share buybacks and $250 million to pay down the revolving credit facility.
Whether the deal ultimately succeeds depends on investors’ belief they are getting a good deal on the sale — the majority of which is to a sister company, the Blackstone-backed Hipgnosis Songs Capital (a joint venture with the royalty fund’s investment advisory, Hipgnosis Song Management, led by Merck Mecuriadis). Hipgnosis Songs Fund has long traded at a steep discount to its per-share NAV. That could partly be explained by higher interest rates that make the royalty fund, launched when interest rates were lower, a relatively less attractive investment to safer bonds. A larger factor could be investors’ lack of faith in NAV. Hipgnosis, which has argued the share price does not accurately reflect the value of its catalog, is now giving the market a transaction to help prove its point.
In the days following the announcement, some analysts have shown concern about the deal’s terms, transparency and related-party buyer. Investec analysts criticized the deal for valuing the assets “as being little more than the IPO price” in an investor note on Friday (Sept. 15) and stated, “there is substantial value leakage to related parties that again sadly raises significant corporate governance concerns.”
Numis predicts that Hipgnosis investors’ views will be “mixed, particularly given the Round Hill offer,” analysts wrote in a Sept. 14 investor note. In that deal, announced Sept. 8, Round Hill Music Royalty Fund — a royalty fund listed on the London Stock Exchange like Hipgnosis Songs Fund — received a buyout offer from U.S. music company Concord. Unlike the Hipgnsosis deal, Concord bid for the entire publicly traded company — at a price 11.5% below Round Hill’s net asset value. It’s a more straightforward transaction than Hipgnosis’ proposed partial catalog sale.
Numis believes that Hipgnosis’ share price’s discount to NAV “may persist for some time,” which could mean the board and the investment advisor, Hipgnosis Songs Management, “will continue to come under pressure.”
Analysts at Stifel, who have long been critical of Hipgnosis and Round Hill’s music royalty funds’ valuation methodologies, focused on the value Hipgnosis Songs Fund was extracting from Hipgnosis Songs Capital. The $465 million transaction consists of two parts. The first disposal worth $440 million, which accounts for 95% of the purchase price, is 17.5% below the fair value and 26% above the catalogs’ acquisition price.
Little is known about the smaller, second disposal that amounts to a $25 million slice of a catalog acquired from Kobalt Music in 2020 for $323 million. Hipgnosis Songs Capital is not the buyer of the second disposal.
Adding to the deal’s complexity, Hipgnosis Songs Fund is on the hook for bonuses and other payments under the original acquisition agreements; the company believes that will amount to $5.5 million, and it will be capped at $30 million. In addition, Hipgnosis Songs Capital is due royalties on the acquired catalog earned going back to Jan. 1 — about $15.3 million through Sept. 14.
“The complex nature of the deal suggests that it is hard to say the NAV has been validated,” wrote Stifel analyst Sachin Saggar.
If the share price is any gauge of investors’ initial reaction to the deal, opinions aren’t good. Shares of Hipgnosis Songs Fund dropped 6.5% on Thursday and another 7% on Friday. The 13% two-day decline eliminated nearly all of the 15.7% bump the share price received on Sept. 8 following news of Concord’s bid for Round Hill.
If investors are considering what Hipgnosis Songs Fund has left after the sale, they will find many jewels remaining in its catalog, including Neal Schon of Journey, Christine McVie and Lindsey Buckingham of Fleetwood Mac, Red Hot Chili Peppers, Tom DeLonge of Blink-182, Neil Young, Blondie, Steve Winwood, Rodney Jerkins, Chrissie Hyde of the Pretenders, RZA, Teddy Geiger and The Chainsmokers. Five of those names — Journey, Red Hot Chili Peppers, Blink-182, Fleetwood Mac and The Chainsmokers — rank in the year-to-date top 500 recording artists ranked by global on-demand audio streams, according to Luminate. Two of them, Red Hot Chili Peppers and Fleetwood Mac, are in the top 100. It’s also keeping Walter Afanasieff, co-writer of Mariah Carey’s “All I Want for Christmas Is You,” which is a No. 1 song in the United States, United Kingdom and Canada every November and December.
Hipgnosis is giving up some quality, though: The 29 catalogs in the first portfolio include 21 of 473 songs in Spotify’s Billions Club, five of Rolling Stone’s 500 Greatest Songs, and five of YouTube’s 30 most-viewed music videos. They include some older music by Barry Manilow and Rick James as well as newer artists like Poo Bear, RedOne, Martin Bresso and Colombian star Shakira, who ranks No. 55 in global audio on-demand streams. But, on average, these are younger songs with less proven royalty histories than the average song in Hipgnosis Songs Fund’s portfolio. In general, younger songs are less valuable than older, more established songs. Shareholders will vote on the sale at the annual general meeting.
The second disposal represents “non-core” assets worth $25 million that represent a small portion of the 33,000 songs acquired from Kobalt Music for $323 million in 2020. That deal also included the 18,000-song publishing catalog of Canadian music company Nettwerk. Hipgnosis Songs Fund said at the time it paid Kobalt an 18.3 times net publisher share multiple for the catalogs.
Hipgnosis believes the two disposals achieve multiple aims. The $465 million price tag is “the smallest possible that would provide the required capital” for share buybacks and debt repayment, the company stated in a press release. Also, the catalogs the company chose to sell leave intact “the fundamental investment case for Hipgnosis Songs Fund….by protecting the strength of the remaining portfolio.” Come October, we’ll see what investors are thinking.