A hit song is a hit song regardless of the economic cycle. In fact, in down-times people often turn to music to lift their mood and so music is a predictable asset over the long-term, which arguably will only increase in value as music streaming grows globally. This was the philosophy that encouraged music industry executive, Merck Mercuriadis and Rock and Roll Hall of Fame and award winning producer and musician, Nile Rogers to establish the Hipgnosis Songs Fund [LON:SONG] in 2018.
Hipgnosis IPO-ed on the London Stock Market in July 2018, and was a stock market darling, with its debut oversubscribed, no doubt as a result of the glitter and glamour sprinkled by its music industry connections, and announced its first transaction, a 75% stake in Carolina rapper and producer, The-Dream’s back catalogue for GBP18.8m. The-Dream’s repertoire included the hits Single Ladies, by Beyonce, Umbrella by Rhianna and Justin Bieber’s Baby. In its first fund-raise, the investment fund raise over GBP202m, well over its target.
Hipgnosis is fundamentally a royalty-business
By the end of the calendar year, Hipgnosis had added the Poo Bear catalogue of 214 songs, including Bieber’s English-language version of Despacito and a 37.5% stake in Bernie Edward’s back catalogue, as well as buying TMS’s catalogue and Tricky Stewart’s catalogue, each of 121-songs, including hits by Britney Spears, Madonna and Mariah Carey. By April 2019, Hipgnosis had shy of another GBP150m in the bank followed-up by another GBP50m fundraise in the summer and then raised another GBP233m that October, bringing its warchest to in excess of GBP650m.
- Burberry bid: Any substance to ongoing takeover rumours?
- Share tip: a British engineering company that flies under the radar
- Share Tip: International ad agency banking on new vision
Promotion to the Premium Shares list of the LSE quickly followed and the fund was bumped-up to the FTSE250 index. By July 2020, Mercuriadis was talking up an acquisition pipeline of GBP1bn and announced revenues of GBP65.7m for 2020 with the fund’s market capitalisation in excess of GBP1bn. By the end of the year the fund had over 13,500 songs on its books, was worth GBP1.25bn and in its last fundraising of the year managed to raise GBP190m in 72-hours. 2020 was a good year for Hipgnosis.
Hipgnosis is fundamentally a royalty-business, it doesn’t produce or write songs, it just buys the back catalogues of artists, writers and producers and makes its money from the royalties generated by these song catalogues. The company collects royalties from a variety of sources, including streaming services, when a song in Hipgnosis’s catalogue is streamed on a streaming service, such as Spotify or Apple Music, the company receives a royalty payment. Hipgnosis also charges radio stations a royalty when one of its songs is played on the radio.
In addition, Hipgnosis receives mechanical royalties as when a song in Hipgnosis’s catalogue is reproduced on a physical medium, such as a CD or DVD, the investment fund receives a mechanical royalty payment. Hipgnosis also charges TV stations and advertisers a synchronisation fee when one of its songs is used in a show or advertisement, and if the song is performed live, Hipgnosis charges a performance royalty.
The fund can also raise money from the sale of its catalogues, either individual songs or full books, and this is where the fund is now – but more on that later.
Hipgnosis under pressure from debt
The fund was so popular between 2018 and 2020, that it started to gain notice from the banking sector and in 2021 American private equity firm, The Blackstone Group, partnered up with Mercuriadis taking an ownership stake in Hipgnosis Songs Management – a private company owned by Mercuriadis that acts as the investment advisor to Hipgnosis Songs Fund and saying together they would look to invest USD1bn in the acquisition of song catalogues and music rights. The relationship is that Hipgnosis Songs Fund invests in music rights, while Hipgnosis Songs Management manages those rights.
That year Hipgnosis’s share price hit its highest level, 129.2p in October 2021 and (to borrow the title of a Nile Rogers’ hit with French electronica duo, Daft Punk) investors, Mercuriadis and Blackstone were looking to Get Lucky, well even luckier than they had been since IPO.However, since then the share price has crumbled. Hipgnosis Songs Fund opened this week (23rd October) at 77p, a fall of 40.4% from its 2021 high point. This year, so far, the fund has fallen 12.1% and over one-year has fallen 8.7%. The fund still has a market cap of GBP937m, and its shares have ranged between 58p and 99p over the past 52-weeks.
So what went wrong? It has – to use a Stevie Nicks song title owned by Hipgnosis – been a substantial Fall From Grace and especially in the last few weeks the fund has come under significant pressure mainly due to the debt it has taken out. It had around USD600m on its books, and with the rise in interest rates over the last twelve months, this has been a major drag on the fund just to service the interest. The fund hasn’t made any new acquisitions in the last twelve months and has not tried to approach the equity market for new funds.
Is the fund overinflating the value of its portfolio?
The fund managed arrange a USD700m revolving credit facility with a syndicate of banks led by City National Bank a year ago, which refinanced the earlier debt and gave the fund a little breathing room.
However, the Hipgnosis Songs Fund isn’t the only Hipgnosis player in the market. Alongside the privately-held Hipgnosis Songs Management, Mercuriadis also created Hipgnosis Songs Capital with USD1bn from Blackstone, and these two entities have been busy, with more than USD300m of deals in 2022, including Justin Timberlake and Leonard Cohen’s back catalogues.
At the time, CNB SVP, Jim Irvin said: “We are extremely optimistic about Hipgnosis Songs Fund’s growth and potential, which is why City National Bank is pleased to provide debt refinancing.” The new facility reduces the margin on the company’s debt and stabilises its payments during a volatile time for interest rates.
This year also saw Hipgnosis caught in the general stock market decline, and increasingly investors and analysts started to question the value that Hipgnosis Songs Fund had for the books of songs it had under management, with some saying that the fund was overinflating the value of its portfolio, especially as the growth rate in streaming royalties has decline over the last twelve months.
A clean break from current management
The company has tried to balance its books, and has tried selling-on bits of its portfolio. Earlier this month, the fund cancelled its dividend as it admitted that its portfolio might be worth less than it had previously believed, following an assessment by valuer, Citrin Cooperman that priced the royalties its portfolio would receive for songs played between 2018 and 2022 at USD9.9m, against Hipgnosis’ valuation of USD21.7m.
If the dividend was paid out, the fund would have breached the covenants of its RCF. The fund then proposed to sell around 20% of its portfolio – at a significant discount – to Hipgnosis Songs Capital, the private Blackstone-Mercuriadis vehicle for USD465m.
This raised a number of red flags for investors, and the corporate governance structure of the fund has come under scrutiny and last week Metage Capital, one of the fund’s institutional investors, performed a Mic Drop in an open letter ahead of a shareholder meeting this Thursday (26th October) saying that the fund needed a clean break from current management and “a reset is urgently required”.
It is sweaty times for the fund’s current directors, who might not be in a job this time next week. The company hastily promised to undertake a strategic review, that would among other things look at its current management arrangements (with Mercuriadis) but is still pushing the discounted catalogue sale to Hipgnosis Songs Capital to raise money to initiate a USD180m share buy-back and pay down USD250m of debt to its lending syndicate.
The fund made promises to look for a new chair, and phase out its current directors through retirement, but sacking Mercuriadis is more problematic, as taking him out of the equation would breach the covenants of the RCF and the lenders would order immediate repayment of the debt, unless a new Investment Manger (approved by the banking syndicate) was not in place. As it stands, the fund would have to give Mercuriadis 12-months notice of termination and pay his companies an additional one-time termination fee equal to one year’s advisory fee calculated on NAV as at the termination date. Moreover, Mercuriadis has the option to acquire the fund’s entire portfolio on termination.
Is Thursday’s meeting make-or-break for Hipgnosis?
Obviously, something has gone horribly wrong and Thursday’s meeting could be seen as a call on whether the fund is sustainable and whether – given the covenants and contracts governing making any changes to business as usual – it can survive.
It looks bleak, however the fund has a collection of incredible assets under management, the problem lies with where those assets are held – a dysfunctional fund. For all Mercuriadis’ faults, he was the guy that acquired the assets, and obviously knows the business intimately. The long-term outlook for streaming is incredibly strong.
It’s crunch time. Mercuriadis will be loathe to walk away, but its likely the shareholders, out for blood will want their pound of flesh at Thursday’s meeting. Mercuriadis has the whip hand, as with Blackstone in the background should have the financial muscle to take the portfolio private. There might be some middle ground here, but all eyes will be on the offices of Link Asset Services at 11:00 on Thursday.