Big news from the Hipgnosis family of companies.
As predicted by MBW earlier this year, UK-listed Hipgnosis Songs Fund (HSF) has today (September 14) issued its shareholders a proposal to sell 29 catalogs from its portfolio for USD $440 million to another Hipgnosis fund – the private, Blackstone-backed Hipgnosis Songs Capital (HSC).
Both sides of the deal are being represented by separate teams within each fund’s mutual investment management company, Hipgnosis Song Management (HSM).
In an announcement to its investors this morning, Hipgnosis Songs Fund (aka HSF, aka SONG) makes no bones about one of its primary motivations for selling the 29 catalogs to HSC: That it will act “as a catalyst for a re-rating of [HSF’s] share price”.
That planned re-rating, Hipgnosis founder Merck Mercuriadis explained in an internal Hipgnosis memo today, would be achieved by HSF (a) putting the proceeds of the transaction towards paying down $250 million of debt currently drawn from HSF’s revolving credit facility, as well as (b) acquiring $180 million of its own shares via a buy-back.
Explained Mercuriadis to his employees: “As you know, as a result of global macroeconomic conditions the UK markets have been having a very difficult time and the majority of Investment Trusts are trading at a severe discount. This includes Hipgnosis Songs Fund (SONG) where despite having just had our best like-for-like results our shares have also been trading at a significant discount to the fundamental value of the Songs we have invested in.
“Having consulted with many of SONG’s largest shareholders, alongside the Board, we have announced a plan which will release cash enabling SONG to reduce debt and ‘buy back’ shares in the market. This is something which companies do when their share price appears to be artificially low.
“A buy back is one of the methods that companies use to return value to shareholders and companies who do buy backs expect it to lead to a higher share price. This is how you ‘re-rate’ the shares.”
The 29 catalogs that Hipgnosis Song Management is proposing to sell from HSF to HSC include rights/income streams from writers including Poo Bear, Ari Levine, Joel Little, Shakira, Barry Manilow, and Rick James (see below for the full list).
The $440 million offer price reflects a multiple of 18.3x historical Net Publisher Share (NPS) of the 29 catalogs, says Hipgnosis. It also reflects a premium of +26% vs. the original cumulative acquisition price of these catalogs.
Highlighting HSF’s belief that its share price is currently heavily discounted, the $440 million price also reflects a +51% premium on the value of the 29 catalogs implied by Hipgnosis Songs Fund’s public market cap for the 30 days ending September 13.
From January 1, 2023 to date, says HSF, the catalogs in question have generated approximately $15.3 million.
If the proposed $440 million sale is completed, Hipgnosis Songs Fund says it would remain the owner of 81% of its existing portfolio by Fair Value, with an increased focus on older vintages.
Hipgnosis Songs Fund would retain ownership of seven of its ten largest catalogs post-the deal, says the company.
An additional $25 million transaction…
There are additional important parts to this story, too.
Hipgnosis Songs Fund has also proposed to its shareholders today that it sell a second portfolio of catalogs – this time not to Hipgnosis Songs Capital, but to a third party on the private market.
The proposed price for this transaction is USD $25 million, taking the full amount of catalog sales proposed by HSF today to $465 million.
They do not, however, include the biggest revenue-earning assets acquired in that transaction, including songwriting rights from Steve Winwood, B-52’s, and Walter Afanasieff (co-writer of Mariah Carey’s All I Want For Christmas Is You).
“In order to make the [2020 Kobalt fund] acquisition we had to also acquire 20,000 non-core songs where we do not own the songs outright or have rights in perpetuity. These songs also have ongoing accounting and approval obligations to thousands of songwriters which is not our core business.”
Merck Mercuriadis, Hipgnosis Songs Fund
Merck Mercuriadis explained in his internal note to staff today: “We bought Kobalt Fund One for our perpetual ownership of Steve Winwood, Walter Afanasieff and [his] great songs such as All I Want For Christmas Is You, 50 Cent, George Benson, Bonnie Mckee and her great songs with Katy Perry et al.
“In order to make that acquisition we had to also acquire 20,000 non-core songs where we do not own the songs outright or have rights in perpetuity. These songs also have ongoing accounting and approval obligations to thousands of songwriters which is not our core business. [HSM is] a Song Management company that manages extraordinarily successful songs of great cultural importance, not a publisher.”
Following a successful sale of these 20,000 “non-core songs”, says Mercuridis, the average “revenue for each of [HSF’s] songs will increase by over 75% from $1,990 per song to $3,500 per song”.
He adds: “Our focused portfolio of higher earning songs can [then] be more effectively actively managed to deliver the strong synch and revenue growth [that HSF’s] recent results have proven possible.”
It appears likely that the 20,000 “non-core songs” mentioned by Mercuriadis include most if not all of a tranche of 18,000 songs that were originally part of the Nettwerk music publishing catalog.
These assets were then sold to Kobalt Capital in 2016, before being sold again as part of the ‘Kobalt Fund One’ transaction to Hipgnosis in 2020.
The $440 million Hipgnosis Songs Capital offer is not a done deal… yet
There are a few other important strands to this story – which MBW will undoubtedly dig deeper into later.
One of those strands is the fact that Hipgnosis Song Management (HSM) – the investor advisory company run and minority-owned by Merck Mercuriadis, and majority-owned by Blackstone – has agreed to a new pricing tier system for fees paid to it by Hipgnosis Songs Fund. In practice, this would lower HSF’s usual investor-management-related fees for the $440 million HSC acquisition, and for future HSF transactions.
But for now, the other vital thing you really need to know is this: Hipgnosis Songs Capital might yet face some competition to acquire the 29 catalogs from HSF.
That’s because the proposal issued to shareholders today includes a ‘Go Shop’ provision, which ensures that Hipgnosis Songs Fund has 40 days from the announcement of today’s proposed $440 million transaction to “solicit alternative transactions [for the same assets] from third parties”.
If a third party comes in with an offer that is bigger in net monetary terms than HSC’s $440 million offer, then HSF will sell the 29 catalogs to that third party.
Yet there are a couple of significant finer details to understand here, too:
- (i) Hipgnosis Songs Capital (via Hipgnosis Song Management) has a ‘matching right’ that means if it agrees (with Blackstone’s funding) to match any superior third-party bid, then HSF has to sell HSC the catalogs in question, rather than any rival bidder;
- (ii) Said ‘superior’ hypothetical bid from a third party would have to exceed the aggregate cash net proceeds that would ultimately reach HSF’s coffers should HSC’s $440 million offer be executed. What that really means: The ‘superior’ offer would have to be bigger than HSC’s $440 million offer when you take into consideration… (a) Any investor management company fees (and, as mentioned, HSM has lowered its typical fees in the $440 million proposal); (b) A $6.6 million ‘termination fee’ that would have to be paid to HSC if another bidder acquires the 29 catalogs; and (c) Other costs, largely covered by this language in today’s proposal: “[A]ny other contingent consideration in an alternative transaction shall be subject to a discount to such amount as is reasonably probable to actually be paid to [HSF].”
Last important thing to know: Should the $440 million transaction not be bettered by a third party (in terms of net cash proceeds to HSF) over the next 40 days, Hipgnosis expects the deal will be completed 13 business days after its Annual General Meeting, which is due to take place before October 25.
(That AGM is also where Hipgnosis Songs Fund shareholders will carry out a ‘continuation vote’ as to whether they wish to continue trading as a public company on the London Stock Exchange.)
However, if HSF receives a “superior” offer from a third party via that “Go Shop” clause in the next 40 days – and presuming that HSC doesn’t then match that offer with a higher price – Hipgnosis will delay HSF’s AGM to a date no later than November 30.
Following this, the 29-catalog transaction will then be completed 13 business days after this AGM.
You can read Merck Mercuriadis’ note to Hipgnosis employees sent today (September 14), and obtained by MBW, below.
Dear Hipgnosis Family,
A few minutes ago we made an important announcement.
As you know, as a result of global macroeconomic conditions the UK markets have been having a very difficult time and the majority of Investment Trusts are trading at a severe discount. This includes Hipgnosis Songs Fund (SONG) where despite having just had our best like-for-like results our shares have also been trading at a significant discount to the fundamental value of the Songs we have invested in.
Having consulted with many of SONG’s largest shareholders, alongside the Board, we have announced a plan which will release cash enabling SONG to reduce debt and “buy back” shares in the market. This is something which companies do when their share price appears to be artificially low. A buy back is one of the methods that companies use to return value to shareholders and companies who do buy backs expect it to lead to a higher share price. This is how you “re-rate” the shares.
As you are aware Hipgnosis Song Management has two clients SONG and Hipgnosis Songs Capital (HSC) and a deal has been signed to sell 29 catalogues from SONG to HSC in order to execute the above strategy while allowing us to maintain our commitment to our songwriters to be the perpetual custodians of their iconic work. I would like to thank our partners at Blackstone for their hard work and support in bringing this deal to fruition.
Additionally, as a separate transaction we have agreed in principle to sell some of the Songs purchased when we bought Kobalt Fund One in 2020 to a third party that will be named on completion of the deal. We bought Kobalt Fund One for our perpetual ownership of Steve Winwood, B-52’s, Walter Afanasieff and great songs such as All I Want For Christmas Is You, B-52’s, 50 Cent, George Benson, Bonnie Mckee and her great songs with Katy Perry et al. In order to make that acquisition we had to also acquire 20,000 non core songs where we do not own the songs outright or have rights in perpetuity. These songs also have ongoing accounting and approval obligations to thousands of songwriters which is not our core business. We are a Song Management company that manages extraordinarily successful songs of great cultural importance not a publisher.
To demonstrate the importance of this move, following the sale of the non core songs the revenue for each of our songs will increase by over 75% from $1,990 per song to $3,500 per song. Our focused portfolio of higher earning songs can be more effectively actively managed to deliver the strong synch and revenue growth the recent results have proven possible.
It’s important to say I take my responsibility to the songwriters who have entrusted us with their iconic songs and equally well to our shareholders in SONG (and HSC) very seriously.
It is of absolute importance to me to ensure SONG shareholders, who have collectively been with us in establishing Songs as an asset class continue to have the opportunity to be invested in Hipgnosis and to experience the net asset value growth we always promised.
Having recently announced our best like for like income growth of 12.1%, the fund is perfectly placed to capitalize on the demonstrated pricing power of the DSPs, the successful passing of CRB III and CRB IV, artist centric / songwriter centric music streaming models and songwriters being paid at the highest rates ever in the streaming era as we see more than a billion paid subscribers to music streaming services in sight. All this gives us great confidence of delivering exceptional returns in the future.
These deals will demonstrate that the current value of the portfolio is substantially higher than is reflected in the share price, while protecting the portfolio and improving the long-term ability of the company to deliver superior value for shareholders.
As part of SONG’s processes to ensure good corporate governance, we have agreed and are now entering a 40-day “Go-Shop” period where other potential buyers of the catalogues SONG has entered agreement to sell to HSC can come forward. This will protect shareholders as they will know they are receiving the best price. A 3rd party bidder would have to pay significantly higher net proceeds and importantly HSC has the right to match so I have a high level of confidence in the process. Once we get past that the transaction will be subject to shareholder approval and a passing of the continuation vote.
As part of the announcement today, we have also said that we will introduce additional tiers to the management fee which SONG pays to HSM, in part reflecting our confidence in the future of the Company. As we have said before, HSM is a well capitalised business and we intend to continue investing in our people and systems in order to support our two clients.
Our efforts put SONG in the best possible place for the upcoming Continuation Vote at the AGM later this year. I have spent much of the last two days meeting with our largest shareholders about these proposals and I am confident they share my view and continue to believe in SONG’s significant long-term growth potential and welcome the actions we have taken. I remain confident in our investment case and that shareholders, particularly given today’s announcement, will vote for the Continuation of the Fund.
Over the last few months, whilst negotiations have been taking place, I understand that it has been challenging with many people working in small teams protecting both the confidentiality of the process and ensuring that both SONG and HSC were receiving the best possible and independent advice. I hope you can all now see why that confidentiality was necessary and I thank you all for the incredible effort and professionalism that you have put into this process.
You may also be aware that your colleagues who have been working on the sale to HSC (a project known as Project Moon) have been separated into individual teams – one supporting SONG (Team West), one supporting HSC (Team East) and 2 neutral teams (Teams North and South) supporting the process in general. During the Go-Shop period and prior to completion of the transaction with HSC, our colleagues will continue to operate in these teams and under strict protocols to ensure the integrity of the process.
It is important to remind you that irrespective of whether you are in one of these teams or not, all confidential and price sensitive information should not be shared externally and only as necessary to complete your work internally. To ensure the integrity of the Go-Shop process, it is particularly important that you do not discuss it with anyone. If approached about it, you should simply state that you are unable to discuss it. If necessary you can direct anyone to speak with me or Ben instead.
If you have any questions regarding these governance controls, please do not hesitate to speak with myself or Ben.
Finally and most importantly I would like to thank everyone – including our partners at Blackstone – who has worked so hard to get these deals to this point. Your incredible efforts will help to strengthen SONG, HSC and HSM and allow us to continue our success including being the first (and soon to once again be the only!) pure-play listed music investment.
Equally I’d like to thank everyone else who has had to keep all our essential daily activities going over the last few months. All of your efforts are much appreciated.
We have come a long way in just over 5 years to establish songs as an asset class where the world’s greatest institutional investors have access to the iconic songs that make the world go round and further to this to create a new paradigm of Song Management where these important songs and the legacies of the incredible songwriters that created them are managed with responsibility and enhanced.
You can read the full announcement here.
Merck Music Business Worldwide