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If investors in Hipgnosis Songs Fund, the London-listed proprietor of music rights to artists including Blondie to Neil Young, were not already enraged, Monday presented fresh fuel to the rebellion. The fund will forgo dividends at least until its next financial year to preserve cash; This is in addition to the cancellation of the previous quarterly distribution.
However, infuriatingly, the blame is being placed on an increase from $23 million to $68 million (£18.5 million to £55 million) this year in so-called “Catalog Bonuses” – a performance-related payment set out by previous acquisition agreements. Have form. Since if the terms of a deal are well drafted to remove performance hurdles, it should be beneficial not only for the seller but also for the acquirer, Hipgnosis shareholders may justifiably wonder whether these payments would be worth it. Why was the process not explained earlier?
Nevertheless, welcome to the mysterious world of music rights, where crucial financial details of acquisitions, let alone add-ons, are seldom disclosed. The outcome is a class of “alternative” assets where too much trust is placed on the board and its investment manager. Hipgnosis is a case study in what happens when trust is lost.
Shareholders rejected two proposals last month. The first one was to sell one-fifth of the 65,000-song catalog for $440 million, and it seemed like a squander from the moment it was announced because the discount to book value was an unappealing 24%. To complicate matters, the proposed buyer was private equity firm Blackstone, which, similar to the Hipgnosis fund, has Merck Mercuridis as its investment manager. The music rights industry is a small world, but the potential for conflicts of interest was obvious.
The second vote on “continuation” was more significant because the rejection instructed the board to devise a new strategy for the fund – the apparent options were to close the portfolio or sell all or part of it. The motivation for demanding radical action was wholly understandable; the fund’s market value is hovering around the 70p mark, compared with a book value of about 150p per share, or approximately $2.2 billion.
At the time, the expectation was that a newly constituted Hipgnosis board (new-looking because several celebrities had been voted out or resigned) would have to generate some innovative ideas by the end of the following April. That timetable now appears very slow after the extension of the nonpayment period for dividends. The entire investment appeal of these music rights funds is regarded as reliable income through a steady stream of royalty payments. If investors can’t even rely on dividends while they wait, the end game has truly arrived.
The revamped board will have to lay down some tracks and begin alleviating the pain for investors. If this entails severing ties with Mercuridis and his firm as managers of the fund, it should calculate the costs of doing so. Moreover, since an outright sale of the portfolio seems to be the cleanest exit, there is a necessity to gain an understanding of what can be accomplished in the open market. However, there should be no need for navel-gazing for the first six months.