State Champ Radio Hipgnosis Songs Fund
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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.
Concord’s $469 million bid for Round Hill Music Royalty Fund, announced on Friday, did more than give Round Hill’s shareholders a tidy premium over the previous day’s closing price. The offer, which must be approved by 75% of Round Hill shareholders at the company’s Oct. 18 general meeting, also provides a vote of confidence in music asset valuations and the ability of the marketplace to seek out value.
Andy Moats, director of music, sports and entertainment at Pinnacle Financial Partners, says Concord’s offer is “a win-win for all parties.” Round Hill, which had been trading at a steep discount to its catalog’s value, was offered a premium over the share price prior to the announcement. Concord gets to pay fair-market value for a catalog of 150,000 songs by the likes of Bruno Mars, The Supremes and Louis Armstrong.
The deal comes as Round Hill’s share price struggled to meet expectations and falls short of it the value ascribed by multiple independent experts. Concord bid $1.15 per share, 11.5% below the per-share net asset value (NAV) ascribed to Round Hill by Citron Cooperman, a leading valuation expert. Round Hill’s shares had been trading at a 47% discount to NAV the prior day and had fallen 11.5% year to date.
But the fact that Concord’s bid is slightly below Round Hill’s NAV shouldn’t be viewed as a negative, says Larry Miller, clinical professor and director of music business program at New York University. “When you see a liquidity event like this at even close to NAV, I think that is a sign of a strong business fundamentals, notwithstanding how some class of investors — in particular investors in alternative assets — might view the value of the catalog to NAV.”
Moats agrees that Concord’s bid should be seen as a positive despite falling short of Round Hill’s recent NAV. “It was consistent with what we’ve seen in the past” in terms of where deals transact, he says. Not all deals close precisely on valuations, Moats says. Some prices are above valuations and some fall below. The Round Hill price is “within range of what I’ve seen over the last five years where something trades relative to its valuation,” he says.
Other people see additional positives in Concord’s bid for Round Hill’s music royalty fund — which still leaves Round Hill with a substantial publishing and recorded music business. To some, the acquisition reflects a functioning market in which Round Hill’s music assets are moving to Concord’s more efficient cost structure.
Roy Salter, senior managing partner at Virtu Global Advisors, says the deal shows the market is working as intended. “Among the major messages symbolized by the Concord transaction is the continuing advancement of music royalty capital market efficiencies, wherein an increasing number of pension and profit-sharing funds, insurance companies, sovereign funds and similar capital market constituents are steadily entering the market in search of predictable, non-correlated investment returns, and business operations which support music royalty administration continue to be enhanced such as enables optimal market-efficiencies,” he says.
For others, Concord’s bid is an important vote of confidence for firms’ NAV models. “The key takeaway from this Round Hill deal is that it affirms the valuation methodologies that have been used for large music portfolios,” says Michael Poster, an attorney with Michelman & Robinson. “For all the negativity that has come out of a handful of analysts around some of these valuation methodologies, at the end of the day, the market tells the story.”
NAV, a measure of an investment fund’s assets minus debts and liabilities, has been a sticking point for Round Hill and the other publicly traded music royalty fund, Hipgnosis Songs Fund, in recent years. Citron Cooperman, FTI Consulting and other valuation experts employ valuation models that calculate music catalogs’ values by estimating their cash flows over a lengthy period of time. A company’s NAV can improve if the valuation expert believes the catalog merits a lower discount rate, for example, or because favorable industry trends suggest previous revenue forecasts are too conservative.
Some equity analysts have raised questions about not just the valuations but the music industry’s tendency to constantly update NAV. Most funds in other sectors hold their new acquired assets at cost “until there are verifiable reasons” — such as a market transaction — “to suggest a change is warranted,” Stiefel analysts wrote in a Jan. 7, 2021, note to Hipgnosis investors.
Over the last roughly two years, a gap between independent valuation expert’s NAV and Round Hill’s trading price had widened dramatically. The discount to NAV stood at 5% on Dec. 31, 2021, when Round Hill’s NAV was $1.12 per share, and peaked at 51.6% on April 3, 2023, when Round Hill fell to $0.615 per share.
To give the market more faith in its NAV, Round Hill commissioned a second valuation report, by FTI Consulting, that put its NAV within 3% of Citron Cooperman’s estimate. This additional valuation supported Round Hill’s view that its portfolio was being “significantly undervalued” by investors, Round Hill CEO Josh Gruss said at the time.
The move appears to have helped some: Round Hill’s share price rose 19.7% over the following month (Hipgnosis shares, not part of Round Hill’s efforts to change investors’ impressions, fell 4% over that period). But whether investors remained concerned with NAV methodologies or motivated by rising interest rates and other macroeconomic factors, Round Hill’s share price remained well below NAV until last week.
Concord’s bid also provided a boost to Hipgnosis Songs Fund shares that have also been trading at a deep discount to NAV. The day before Concord’s bid was announced, Hipgnsosis shares closed at 0.798 pounds ($1.00), a 58.3% discount to the company’s NAV on March 31 of $1.92. Whether investors regained faith in the NAV or expect Hipgnosis to negotiate a similar asset sale, its shares jumped 15.7% to 0.923 pounds ($1.15) the day of the announcement, peaked at 0.962 pounds ($1.20) on Tuesday and closed at 0.93 pounds ($1.16) on Wednesday.
Had Concord’s bid come in significantly less than NAV, there could have been ripple effects that touched everybody from banks to investors. In such a scenario, people would re-think the value of catalogs and their interest in investing in music assets.
But that didn’t happen. Concord and Round Hill, both widely considered to be smart players in the music asset market, agreed to a price tag close to the often-criticized NAV. If the market was looking for a signal about how to value Round Hill, it received a credible confirmation.
“There’s a lot of stability and consistency in this space,” says Moats, “and this transaction provides that.”
News that Concord plans to buy Round Hill Music Royalty Fund for $1.15 per share sent Round Hill shares soaring 64.4% on Friday (Sept. 8), from $0.6875 to $1.13 per share. They finished the week up 62.6%, leading all music stocks by a wide margin.
The deal, which must be approved by at least 75% of Round Hill’s shareholders at the company’s Oct. 18 general meeting, values the rights in the fund at nearly $469 million. On March 6, an independent valuation from Citron Cooperman put Round Hill’s economic net asset value at $519.6 million, according to the company’s 2022 annual report. That puts Concord’s bid at a 9.7% discount to economic NAV — a vast improvement from the 46% discount the stock had been trading at before the deal was announced.
Round Hill competitor Hipgnosis Songs Fund was also a beneficiary of Concord’s announcement. Shares of Hipgnosis rose 15.7% to 0.923 pounds ($1.15) on Friday, bringing the stock’s one-week gain to 16.8%. Hipgnosis shares have been trading at a steep discount to the company’s net asset value — a measure of the company’s catalog, less liabilities — and hadn’t closed above 0.923 pounds since Sept. 27, 2022. The fact that Concord found a buyer at a price close to its NAV could have signaled to Hipgnosis investors that its shares should be trading closer to its NAV. Some Hipgnosis investors may have also believed that, like the Concord deal, Hipgnosis could also find a suitor that would bid close to the NAV.
Round Hill and Hipgnosis were — by far — the biggest gainers of the week. Overall, the 21-stock Billboard Global Music Index dropped 0.8% to 1,348.41. Year-to-date, the index has gained 15.5%.
No other music stocks had a double-digit gain, and just six others finished the week in positive territory. Twelve stocks lost ground this week and one stock, music streamer Anghami, was unchanged. French music streamer Deezer gained 6.8% and was probably helped by its announcement of a partnership with Universal Music Group to adopt a new system for calculating streaming royalties. Universal Music Group shares improved 3.8% to 23.52 euros ($25.20).
Stocks were down around the world this week. In the United States, the S&P 500 fell 1.3% and the Nasdaq composite dropped 1.9%. South Korea’s KOSPI composite index lost 0.6%. In the United Kingdom, the FTSE 100 was a bright spot with a slight 0.2% gain.
With the help of Round Hill and Hipgnosis, the eight stocks in the record labels and publishing category on the Billboard Global Music Index had an average gain of 10.3%. The other categories saw losses; four live music stocks had a 0.9% average decline, six streaming stocks dropped an average of 3.9% and three radio stocks had a 4.7% average decline.
LiveOne shares fell 10.4% on Friday following the company’s spin-off of its PodcastOne segment on the Nasdaq exchange. That brought its shares’ one-week loss to 21.8%. LiveOne distributed about 19% of PodcastOne shares to LiveOne shareholders of record as of Sept. 5, but the podcast company’s trading debut got off to a rocky start on Friday. Trading under the ticker PODC, shares of PodcastOne owner and operater Courtside Group fell 45.1% to $4.39 from a starting price of $8 per share.
LJ Stoll was named GM/vp of A&R at The Hard Working Record Company, a new Nashville-based record label from Big Machine Label Group (BMLG) and management company Hard 8 Working Group. The venture was struck between BMLG president/CEO/founder Scott Borchetta and Hard 8 co-founders Dirk Hemsath and Rich Egan, along with partners David Conway and Mike Bachta. “Rich and I had been toying with the idea of starting a label again, since that’s the world we both came from,” said Hemsath in a statement. “We had been working closely with Scott and Big Machine on the artist Kidd G and Scott mentioned he wanted to start a more pop-leaning imprint and that’s the world we’ve been in heavily for the last few years, most recently building pop star Tate McRae.”
Hipgnosis Songs Fund global head of song management Nick Jarjour exited his role at the company “as I embark on an exciting new chapter in my journey,” the executive wrote on LinkedIn. “During my tenure at Hipgnosis, I had the honor of working alongside a visionary leader and mentor, Merck Mercuriadis who has achieved remarkable feats for songwriters and revolutionized the music industry for future generations,” he continued. Jarjour will continue serving as CEO of his label, publishing and creative agency JarjourCo.
Andrew Spence was promoted to general counsel at Sony Music Publishing UK, where he will oversee business and legal affairs strategies and initiatives on behalf of the company and its roster while also offering guidance and counsel on its legal and operational matters. The London-based executive will continue reporting to Sony Music Publishing UK president/co-managing director, UK/senior vp of international David Ventura and UK co-managing director Tim Major. He was previously head of legal and business affairs.
Edith Bo was named head of A&R at Rostrum Records, where she will oversee the overall direction of A&R strategy and develop strategic branding partnerships, working closely with Rostrum’s marketing team. Bo joins the company from SoundCloud, where she served as senior manager of publishing. She can be reached at edith@rostrumrecords.com.
Rob Segal joined The Feldman Agency (TFA) as partner/president of TFA Inc. Segal previously founded his own agency, Segal Communications, which became one of Canada’s largest promotional and licensing agencies, with clients including Sony, Ford, Marvel, HP and Dreamworks. In his new role, he will lead the agency in fostering new business, driving marketing campaigns and elevating its brand presence. Based at the company’s Toronto office, he can be reached at rob@feldman-agency.com.
Frederik Boutahar was named vp of A&R at Columbia Records Germany, Switzerland & Austria (GSA), which he will lead alongside vp Alexandra Falken. Boutahar will report to Sony Music Entertainment GSA CEO Patrick Mushatsi-Kareba. He joins the company from TwoSides, where he served as MD. He can be reached at frederik.boutahar@sonymusic.com.
Sebastian Mair joined digital rights management company Muserk as head of business development APAC. He will oversee the company’s business throughout the Asia-Pacific region. Based in Tokyo, Mair developed a relationship with Muserk via his company Music Solutions, which develops brand partnerships and VIP packages for artists touring Asia. He can be reached at sebastian.mair@muserk.com.
Metal label Nuclear Blast Records restructured its A&R department, promoting Nathan Barley Phillips and Shawn Keith to head of A&R, Europe and head of A&R, North America, respectively. Elsewhere, Tommy Jones was promoted to label manager, North America, which includes A&R responsibilities for Nuclear Blast’s existing roster in the region. A&R Jens Prueter was also named to the newly created role of head of catalogue/senior A&R. The label was acquired by Believe in 2018. Keith can be reached at Shawn@nuclearblastusa.com.
Jen Hubbard was appointed to the newly created role of director of sync A&R at Concord Music Publishing, where she will develop and manage Concord’s U.S. songwriter roster for the purpose of synch activity. She will serve as the bridge between the company’s A&R and synch teams. Based in Nashville, Hubbard reports to senior vp of A&R Brad Kennard with support from vp of publishing sync Kourtney Kirkpatrick and executive vp of global sync Brooke Primont. Hubbard previously served as director of A&R.
Avery King, formerly director of publicity at Elicity PR, formed her own public relations firm, King Publicity. She brings her longtime clients Carter Faith, Aaron Watson, Austin Burke and Anna Rose to the new operation. King can be reached at avery@kingpublicity.com.
Steve Eckerson was named GM at ASM Global’s San Diego-based venue Pechanga Arena. He joins from Mechanics Bank Arena, Theater and Convention Center, where he’s served as GM since 2016. Eckerson succeeds Steve Tadlock in the role. He can be reached at SEckerson@pechangaarenasd.com.
UTA announced the promotions of several staffers in its music division. Sean Hendrie was elevated to agent while Jack Benson, Eli Hanavan, Maria Kanatous, Elie Low, Cassie Trimble and Sydney Wilke were upped to coordinators.
LONDON — Hipgnosis Songs Funds reported a 7.5% year-on-year rise in gross revenue to $91.7 million for the six months ended Sept. 30, up from $85.3 million in the same period the previous year, at the company’s bi-annual presentation to investors, held in London Thursday (Dec. 8).
Net revenue — gross revenue minus royalties paid to songwriters under contract and administered catalogs — grew 5.8% to $78.4 million during the same period, while earnings before interest, taxes, depreciation and amortization (EBITDA) increased 16.9% year-on-year to $63.8 million.
Hipgnosis’ portfolio of over 65,000 songs, which includes hits by Dave Stewart, Timbaland, Journey, Mark Ronson and Barry Manilow, and includes the writer’s and/or publisher’s share of 13 of YouTube’s top 30 most viewed videos, has a net asset value (NAV) of $1.52 billion, down from $1.58 billion on March 31, according to the company’s mid-year financial results.
They report its “operative” net asset value as $2.22 billion, down from $2.24 billion six months prior. The aggregate fair value of Hipgnosis’ extensive portfolio was calculated by independent valuer Citrin Cooperman at $2.67 billion.
Speaking at the investor presentation, held at London’s Savoy Place, Hipgnosis’ founder and chief executive Merck Mercuriadis said he shared investors’ concern over the Guernsey-registered company’s share price, which has fallen by nearly 30% on the London Stock Exchange over the past six months as investor interest in music stocks has cooled. The share price at the close of trading on Monday was £0.81.5, down from £1.26.0 at the start of the year.
“I’m not going to pretend that the current share price is anything other than disappointing,” said Mercuriadis at the start of an almost three-hour presentation, which also included talks by Hipgnosis Songs Fund chief financial officer Chris Helm, Hipgnosis Song Management president and COO Ben Katovsky and chief music officer Ted Cockle, as well as a brief live music performance by rock guitarist Richie Sambora.
(Hipgnosis Songs Fund is the acquirer of music publishing and recording rights, while Hipgnosis Songs Management manages the publicly traded company’s catalog. There is also Hipgnosis Songs Capital ICAV, an investment vehicle established in partnership with Blackstone that earlier this year acquired Justin Timberlake’s back catalog, but is separate from the London-listed Hipgnosis Songs Fund.)
Mercuriadis said that Hipgnosis’ current share price “fundamentally undervalues the company” and he was confident the company’s extensive portfolio and proactive drive to grow revenues from its 146 catalogs, coupled with the continued growth of the global music industry, “supports our longer-term expectations for substantial revenue growth” and “will deliver superior shareholder returns over the medium term.”
Despite what Mercuriadis said was a “very challenging environment,” Hipgnosis operative net asset value per share remained steady at $1.8312 in the six months ended Sept. 30, which, when translated into pound sterling (at a sterling to dollar exchange rate of $1.2223), gave an equivalent net asset value of 149.82p as of Dec. 6.
Like-for-like pro forma (PFAR) revenues in the first half of the calendar year was $58.5 million, a 7.8% increase on the comparative period in 2021.
Over the last six weeks, Hipgnosis Songs Fund Ltd., the trailblazing acquirer of music publishing and recording rights, has been buying up a different kind of asset. Over seven transactions since Oct. 18, the company has been repurchasing its own stock, 250,000 shares at a time, to help support its slumping share price. So far, it has spent 1.5 million pounds ($1.8 million) to buy back 1.75 million of its shares. And while that accounts for just 0.14% of the roughly 1.21 billion issued shares, it underscores a crucial conundrum for the publicly traded company.
While, like much of the music business, Hipgnosis’ business has been steadily growing thanks mostly to booming music streaming revenues, its shares have lost 34% of their value year-to-date through Nov. 29. That decline is about six times worse than the 5.7% drop suffered by the FTSE 350 Media Index, representing 10 media companies on the London Stock Exchange. It’s more than triple the New York Stock Exchange composite index’s 10.1% deficit.
Normally, buying back shares lifts a company’s stock by both providing demand (which supports the stock price) and reducing the number of shares outstanding (which increases the per-share equity value). But since Hipgnosis began repurchasing its shares on Oct. 18, its share price has fallen 3.5% while the stock market has solidly improved: Over that time, the FTSE 350 Media index rose 6.8% and the New York Stock Exchange composite index rose 9.5%.
The share repurchases to date have been too few to move the needle. At the Sept. 21 annual general meeting, Hipgnosis’ shareholders approved a repurchase program that can buy up to 14.99% of its issued share capital through Dec. 8. So far, less than 1% of that allowable number has been bought back. And with less than 10 days left until the deadline, Hipgnosis is unlikely to make a much more meaningful dent. As of March 31, the date of Hipgnosis’ latest financial statement, the company had only $30 million in cash and about $100 million of borrowing capacity under its $700 million revolving credit facility. To buy back that full 14.99% stake at the current price and exchange rate would cost the company another $180 million.
But buying enough shares to directly impact the price isn’t necessarily the goal. The repurchase program can still act as a signal to investors that the company believes its stock is undervalued and is taking measures to address the matter. If all goes well, the decision to return cash to shareholders will end up boosting investor confidence in the music fund. That could ultimately help its share price, which is currently trading at a 46.7% discount to the company’s operative net asset value per ordinary share, according to the company’s July 13 mid-year earnings results. (Operative NAV is the fair market value of the catalog with amortization added back.) Even after considering its $570 million of debt (as of March 31), Hipgnosis shares are still trading 27.7% below the catalog’s value.
On paper, Hipgnosis should be a safe bet for investors: It buys dependable, recession-proof music intellectual property that churns out predictable royalties that are uncorrelated with the marketplace. The face of the company, founder Merck Mercuriadis, reshaped music investing by bucking the tradition of using debt to fund catalog acquisitions and launching the first publicly traded, equity-backed royalty fund that focused solely on music assets. Mercuriadis runs an investment advisory, Hipgnosis Songs Management, that collects a fee for managing the publicly traded company’s catalog. Mercuriadis declined to comment for this article.
From 2018 to 2021, Hipgnosis raised almost 1.3 billion pounds ($1.55 billion) through eight offerings on the London Stock Exchange, spending the money, and some debt, on established, proven songs — music publishing, recorded music catalogs and creator royalty streams — by the likes of Neil Young, Journey and Red Hot Chili Peppers. Mercuriadis and his team recommend catalogs for Hipgnosis Songs Fund to purchase and try to generate more revenue from its portfolio. Hipgnosis Songs Fund itself is a lean organization – it has a board of directors and a team of outside accountants, attorneys and other specialists – that collects royalties, pay dividends and operates with minimal overhead. Investors shouldn’t expect the triple-digit returns of a fast-growing tech company, but they shouldn’t face much downside risk, either. Decades-old popular music in a growing industry is a stable investment.
Hipgnosis’ pitch became particularly attractive as low interest rates encouraged investors to pour money into alternative assets like music as central banks cut rates to encourage borrowing to help combat a recession caused by the COVID-19 pandemic. But central banks have hiked interest rates in 2022 to ward off rising inflation, and Hipgnosis and companies like it have seen their share prices fall sharply. An Oct. 27 report by Trust Intelligence posits that Hipgnosis, along with other alternative asset funds, “has seen a significant share price de-rating as investors worry about the potential for valuations to fall in a rising interest rate environment.” Shares of alternative asset managers Blackstone Group – an investor in Hipgnosis Songs Management – and Franklin Resources are down 31.8% and 21.5%, respectively, this year despite the companies’ earnings beating expectations last quarter. Other music companies are having a tough year, too. Shares of Round Hill Royalty Fund Ltd., another music-backed investment trust that trades on the London Stock Exchange, are down 24.9% year to date.
The underlying business underpinning the Hipgnosis catalog and others like it, however, seems as healthy as ever. Global publishing and label revenues climbed 18% to $39.6 billion in 2021 on the strength of streaming services such as Spotify, Apple Music and YouTube. In the U.S., music publishers will enjoy a slightly larger share of subscription revenue from 2023 to 2027. Music subscription prices are rising, too – Apple Music hiked its monthly fees in October and Spotify appears ready to follow in 2023. Social media and short-form video apps such as TikTok are increasingly valuable revenue streams for both publishers and labels. Hipgnosis’s pro-forma revenue – which compares catalogs on a like-for-like basis and ignores recent acquisitions – in the second half of 2021 rose 11.6% from the first half, which was impacted by COVID-19 restrictions that hurt physical sales and performance royalties. In its latest fiscal year ended March 31, catalog additions helped gross revenue grow 24.7% to $200.4 million.
With its stock trading at a large discount to the value of its catalog, though, the company is unable to raise additional equity to expand its catalog. It certainly had plans to do so: In January 2021, Hipgnosis shareholders voted 98.6% in favor of a plan to sell 1.5 billion new shares. At the planned price of $1.68 per share, those additional shares would have raised $2.52 billion. Since then, however, Hipgnosis has sold only 199.6 million shares at an average of 1.21 pounds per share ($1.46), for a total of 241.4 million pounds ($330 million). Money has continued to pour into other funds for music acquisitions: Primary Wave took a $1.7 billion investment from Brookfield Asset Management in October; Influence Media Partners teamed up with Warner Music Group and BlackRock Alternative Investors in July; and last year, KKR partnered with BMG and Apollo Global Management backed upstart HarbourView Equity Partners to the tune of $1 billion.
The share repurchase program could have tangible results: the repurchase of 1% of shares would add 0.5% to the net asset value per share, reduce the dividend payment and “be accretive to annual income by $57,000,” according to JP Morgan Cazenove analysts. Investors could also look elsewhere to gain some confidence. In September, Hipgnosis reiterated its target annual dividend of 5.25 pence (6.34 cents) per share and announced an interim dividend of 1.3125 pence ($1.59) per share. It has also made moves to save money. In July, it reached a deal with French collection society Sacem for reduced administration expenses and collection fees. In October it procured a new revolving credit facility with a lower cost of debt and completed interest rate swaps that provide a hedge against rising rates.
More dramatic steps are available to raise cash, too. JP Morgan Cazenove analysts suggested in an Oct. 24 report that the company could sell “non-core assets” such as the Kobalt fund — 42 catalogs of more than 33,000 songs — it bought in Nov. 2020 for $323 million. The analysts also suggest Hipgnosis could sell part of its catalog to Blackstone, which took an ownership stake in Mercuriadis’ song management operation in Oct. 2021 and provided $1 billion for catalog acquisitions. That would allow Hipgnosis to reduce its debt and free up capital to repurchase shares or invest in new catalogs. Or Hipgnosis Songs Management could seek funding from Blackstone to acquire the entire Hipgnosis Songs Fund portfolio. Another option not mentioned in the report is to sell Big Deal Music, the independent music publisher that Hipgnosis Songs Fund acquired in 2020 and rebranded as Hipgnosis Songs Group, and focus solely on managing its catalog instead of signing and developing songwriters.
Following years of headline-grabbing moves, this has been a relatively quiet one for the publicly traded Hipgnsosis Songs Fund — there have been no acquisitions and no capital raised through stock offerings in 2022. In contrast, the other side of the business, Hipgnosis Songs Management, purchased the catalogs of Kenny Chesney, Justin Timberlake and Leonard Cohen through its venture with Blackstone, Hipgnosis Songs Capital ICAV. In addition, in August Hipgnosis Songs Management raised $222 million from a securitization backed by the royalties of 950 songs from Timberlake, Cohen and others.
Glimpses of what comes next, and how else Mercuriadis plans to address the stock price, could come soon. Dec. 8, the final day of the share repurchase program, is also the day Hipgnosis will release mid-year financial results and host a Capital Markets Day.
