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%.
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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.
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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.
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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.
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