By Jess Jones
Hipgnosis Songs Fund has had a roller-coaster year — and it’s not over yet.
The UK’s largest listed investor in music catalogues and royalties has just delayed its half-year results, claiming an independent valuation is far higher than recent proposed sales have suggested.
Hipgnosis and Mercuriadis have been battling with both the board and shareholders over the valuation of the London-listed fund.
A torrid six months have led to this point, with regretful investors fretting over a dwindling share price and the general collapse of once-popular royalty funds.
What went down this year and how did it all go awry for Hipgnosis?
Following its IPO in 2018, Hipgnosis embarked on a bullish spending spree to beef up its catalogues. It spent nearly $2bn (£1.5bn) on over 64,000 rights to hits by pop icons such as Ed Sheeran, Dua Lipa, Taylor Swift, and Fleetwood Mac — among others.
Towards the end of this period, in late 2021, asset manager Blackstone took an ownership stake in Hipgnosis Song Management (HSM), an adviser to the eponymous investment arm.
After the pandemic, Hipgnosis enjoyed a honeymoon period, as the music industry cashed in on a boom in the value of music rights, spurred on by the continued popularity of streaming platforms.
“For a brief moment, music royalty-related investments were all the rage,” said Russ Mould, investment director at AJ Bell.
It was particularly important to artists as the pandemic ravaged revenue from gigs and touring. They were eager to sell their royalties to maintain glamorous lifestyles.
Hipgnosis shares peaked in November 2021 at a high of 129p with investors rushing to get a slice of the trendiest fund.
Then, in September last year, the stock dropped sharply, from 115p to 83p in under two months. It came amid a rising cost of debt, which hit $600m on 31 March 2022, for Hipgnosis.
“What investors failed to appreciate was that music investment vehicles would be less attractive when interest rates shoot up. They created their business model when rates were next to nothing, but rates suddenly going to four per cent or five per cent suddenly changes the story,” Mould told City A.M.
To soothe investor jitters, the fundentered into a new Revolving Credit Facility (RCF) with a commitment of $700m, running for five years. This means it could withdraw money, use it to fund the business, repay it and then withdraw it again when needed.
At the time, Hipgnosis founder and chief executive Merck Mercuriadis said: “In an increasingly unpredictable debt market, this deal materially reduces our interest margin and the swaps we hope to close imminently provide long-term certainty and a stable platform to take advantage of our industry’s tailwinds.”
But everything really began to come crashing down for Hipgnosis this year.
As the share price showed no signs of climbing into the green, strangling fundraising efforts, investors urged the fund to sell some of its catalogues.
Mercuriadis responded promptly, saying he was “aligned with shareholders” and was working on a number of options to improve value for them.
The company was given a burst of hope a couple of months later when news broke that rival London-listed music royalty firm Round Hill Music (RHM) was set to be rescued by a multi-million dollar buyout. It had also been grappling with a weak stock price.
Shares in Hipgnosis spiked 16.5 per cent as some investors thought the same thing could happen. While it has avoided that fate so far, other issues have since arisen.
In October it scrapped an interim dividend payment due to concerns it would have to breach the terms of its debt covenants.
This was due to a change in rates by the US Copyright Royalty Board, meaning that independent portfolio valuer, Citrin Cooperman, had to significantly lower industry-wide payment expectations.
Hipgnosis would have been unable to afford to meet both the dividend and its lending agreements. Shares dived about 16 per cent.
So the board decided to conduct a “strategic review” looking at alternative management options in an attempt to keep shareholders happy, especially with a big company vote on the agenda the following week.
The vote threatened to oust Mercuriadis who, as well as being the founder of Hipgnosis, is also the founder of the investment adviser, Hipgnosis Song Management (HSM), and holds a minority interest in Hipgnosis Songs Capital.
At the same time, Hipgnosis was also scrabbling to push up a bid for the sale of 29 catalogues, which would help it fund a share buyback, repay debt and catalyse a stock price re-rating. This is something companies do when they believe their share price to be artificially low.
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Another Hipgnosis fund — the private, Blackstone-backed Hipgnosis Songs Capital (HSC) — had offered $440m (£358m), but the Songs Fund wanted more.
All this was abandoned though when the majority of shareholders defied board recommendations, with a landslide vote against the continuation of the company and in favour of a change of chairman.
Robert Naylor, previously non-executive chairman of Round Hill Music until its sale to Alchemy Copyrights, took over from ex-chair Andrew Sutch in early November.
Shareholders must have had some level of confidence in the catalogues since they rejected a sale of them at a price which represented a 26 per cent premium on the original fee Mercuriadis paid.
Following this, the board was given half a year to table proposals for the “reconstruction, reorganisation or winding-up” of the fund. It could end in a partial rather than full portfolio sale.
Earlier this month, the investment trust gave it another shot and announced the sale of 20,000 “non-core” songs — ones they do not own outright — for £18.4m, which it said would be used to repay RCF drawings.
But in the latest announcement today, Hipgnosis revealed it has delayed its interim results until the end of the year latest because it is concerned its catalogues have been undervalued during the recent proposed sales.
It said the valuation it received from its independent valuer for its interim results was “materially higher than the valuation implied by proposed and recent transactions in the sector, in particular, the proposed sale of assets to Hipgnosis Songs Capital”.
The chief executive of New York-listed ETF Musq LLC, David Schulhof, said he thinks an independent appraisal would value the Songs Fund higher than its current market cap.
“But that doesn’t change the fact that shareholders want dividends and capital appreciation on their investment,” he told City A.M.
“The Hipgnosis CEO will need to pursue a strategy of value-oriented deal making (not 25-30x deals) moving forward to satisfy existing and new investors,” Schulhof added.
After a rocky year, the future of Hipgnosis is touch-and-go and Mercuriadis’ position is tenuous, as he could be fired by the new board to appease angry shareholders.
