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Hipgnosis Songs Fund, a British-listed investment company that buys song rights, will sell some of its music for $465 million, including to a sister fund owned by Blackstone, in an attempt to address the deep discount between its share price and net asset value.
On Thursday, Hipgnosis said it would sell 29 music catalogs, including songs by artists such as Nelly and the Kaiser Chiefs, to fund a stock buyback program and reduce debt.
The sale follows a strategic review triggered by shareholder concerns over underperformance of the company’s share price. The company will face a key shareholder vote on its future in October, forcing investors to decide whether to liquidate the fund or support it for another five years.
The company said the sale would fund a share buyback program of up to $180 million, repay $250 million in debt and introduce an additional, lower tier of investment advisory fees.
Hipgnosis launched in 2018 with plans to transform music rights into a mainstream asset class, providing investors with a steady stream of income using royalties from streaming, radio plays and performances. However, as interest rates rise, the fund’s royalty income is relatively less attractive to other asset classes such as bonds. As interest rates rise, so does the cost of debt.
Its shares have also fallen over the past year, raising questions about its strategy given its inability to raise funds to engage in new acquisitions. The company trades at a discount of approximately 50% to its net asset value.
Meanwhile, an unlisted fund of the same name launched in 2021 with support from Blackstone Group and is in the process of acquiring it, confusing investors even more. Blackstone also owns a majority stake in the company’s investment adviser, Hipgnosis Song Management, whose advisory fees are paid by the London-listed fund.
Hipgnosis Song Management said Thursday it believed the deal would “act as a catalyst for a re-rating of the company’s share price.”
Shares of Hipgnosis Songs Fund were up about 1% Thursday morning.
The company said the sale was the “smallest possible size” and would provide the capital needed to execute its debt repayment strategy while ensuring the company’s investment case “remains intact by protecting the strength of the remaining portfolio”.
The transaction price will be approximately 17.5% below the estimated fair value of the song group. But the company said the deal would represent a 51% premium to the valuation implied by the current share price and a 26% premium to the purchase price of the catalogues. The sale is subject to shareholder approval.
Hipgnosis Songs Fund will retain four-fifths of its existing portfolio and said it will focus more on older and potentially more valuable music catalogues.
The company’s board said it continues to believe “the best way to maximize long-term shareholder value is to purchase, hold and actively manage culturally significant assets that will generate income and capital growth over time”.
Hipgnosis CEO and founder Merck Mercuriadis said the deal will allow the company to “execute its strategy of share repurchases and leverage reduction, while also providing clear transaction evidence alongside other recent transactions in the market that the company is currently achievable value”. A company’s catalog can help investors understand the value of a company’s assets and gain confidence in it”.
Analysts at RBC Capital said share buybacks would account for 16% of market capitalization, while debt repayments would lift net debt to net operating assets from 25.8% to 18.8% in 2024, “with a limit of 30%”.
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