Hipgnosis sells $465mn of music to sister fund to strengthen financial position

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Hipgnosis Songs Fund, the UK-listed investment company that buys the rights to songs, will sell some of its music to a Blackstone-owned sister fund for $465mn to try to tackle the large discount between its share price and net asset value.

On Thursday, Hipgnosis said it would sell 29 catalogues of music, including songs by artists such as Nelly and Kaiser Chiefs, to fund a share buyback programme and reduce debt.

The sale follows a strategic review prompted by shareholder concern over the company’s poor share price performance. The company faces a crucial shareholder continuation vote over its future in October that will force investors to decide whether to liquidate the fund or back it for another five years.

The company said the sale would fund a share buyback programme of up to $180mn, the repayment of $250mn of debt and the introduction of additional, lower investment advisory fee tiers.

Hipgnosis was launched in 2018 with a plan to turn music rights into a mainstream asset class, using the royalties from streaming, radio play and performances to provide a steady source of income for investors. However, the fund’s income from royalties has become comparatively less attractive to other asset classes such as bonds given the rise in interest rates. Debt costs have increased as interest rates have risen.

Its share price has also dropped over the past year, raising questions about its strategy given its inability to raise capital to participate in new acquisitions. The company has been trading at a discount of about 50 per cent to its net asset value.

Meanwhile, the launch of the unlisted fund in 2021 with a similar name, backed by Blackstone that is acquiring the rights, has added to investor confusion. Blackstone also majority owns the company’s investment adviser — Hipgnosis Song Management — that is paid advisory fees by the London-listed fund.

Hipgnosis Song Management said on Thursday it believed the deal would “act as a catalyst for a re-rating of the company’s share price”.

Shares in Hipgnosis Songs Fund were trading about 1 per cent higher on Thursday morning.

It said the disposal was the “smallest magnitude possible” that would provide the required capital to execute on its strategy to pay down debt, while ensuring the investment case for the company “remains intact by protecting the strength of the remaining portfolio”. 

The deal will be struck about 17.5 per cent below the fair value estimated on the portfolio of songs. But the company said the deal would be a premium of 51 per cent to the valuation implied by the current share price and a 26 per cent premium to the acquisition price of these catalogues. The sale is conditional on approval by shareholders.

Hipgnosis Songs Fund will retain four-fifths of its existing portfolio, with what it said would be an increased focus on older and potentially more valuable music catalogues.

The company’s board said it continued to believe that “the best way to maximise long-term shareholder value is to buy, hold and actively manage culturally important assets that will deliver income and capital growth over time”. 

Merck Mercuriadis, chief executive and founder of Hipgnosis, said the deal would enable the company “to execute the strategy of share buy backs and reducing leverage but also give clear transactional evidence, alongside other recent transactions in the market, of the current realisable value of the company’s catalogues to help investors understand and have confidence in the company’s asset value”.

Analysts at RBC Capital said the share buybacks would represent up to 16 per cent of the market capitalisation, while the debt repayment would drive net debt to operative net asset value from 25.8 per cent to 18.8 per cent in 2024, “giving plenty of space versus [the] limit [of] 30 per cent”.