Hipgnosis Songs Fund’s assets are now valued at $690 million less than they were before. Blackstone must be licking its lips.

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Blackstone, via the Hipgnosis Songs Capital (HSC) vehicle, acquired Justin Bieber's publishing rights last year (plus a recorded music income stream to his music) for around $200 million. Could Blackstone soon be adding Hipgnosis Songs Fund's portfolio to its privately-owned collection?
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We all knew the day was coming when Hipgnosis Songs Fund‘s portfolio would be re-valued at a smaller dollar amount than it had previously. What we didn’t know was quite how dramatic a change that would be.

As MBW has covered a few times over the past year, UK-listed HSF has, since floating in 2018, employed US-based Citrin Cooperman/Massarsky Consulting to be its ‘independent valuer’.

Citrin Cooperman has naturally used its own formulas to evaluate HSF’s assets during this period – including a much-debated ‘discount rate’ of 8.5%. (Some felt that as interest rates rose in the past two years, that discount rate should have been higher, which would have reduced the size of HSF’s valuation.)

Citrin Cooperman’s most recent valuation of Hipgnosis Songs Fund concluded that the value of HSF’s portfolio was USD $2.62 billion. (This valuation came in the same set of results that showed HSF’s like-for-like revenues grew by 14.0% YoY in the six months to end of September.)

Since then, Citrin Cooperman and HSF have parted ways – while HSF’s board has commissioned a “strategic review” of the company by respected US-based music M&A experts, Shot Tower Capital.

Today (March 4), Shot Tower gave its own view on what HSF’s portfolio is worth in the modern marketplace…. and it’s a darn sight more conservative than Citrin Cooperman’s.

According to an investor update from HSF’s board, Shot Tower estimates the fair value of HSF’s portfolio (as of March 1, 2024) at between USD $1.80 billion and $2.06 billion (or between $1.74 billion and $2.00 billion after contingent catalog bonuses are deducted).

According to the HSF board, the midpoint of Shot Tower’s valuation of HSF is $1.93 billion, which represents a reduction in value of 26.3% vs. that $2.62 billion valuation from Citrin Cooperman (as of September 30).

In simpler terms: Hipgnosis Songs Fund is now valued at about $690 million less than it was before.

A couple of interesting things about the formula Shot Tower used to reach its ~$1.93 billion valuation:

  1. It used a mid-point discount rate of 9.63%, approximately 1.1% higher than the 8.5% discount rate deployed by Citrin Cooperman;
  2. Shot Tower says, amongst other considerations, its valuation has taken into account how many of HSF’s assets are “passive” (whereby HSF doesn’t control administration, distribution, or licensing of a song). The inference appears to be that Shot Tower has valued HSF’s “passive” rights at a lower multiple than its “active” rights. Shot Tower says that approximately 65% of HSF’s royalty income today is derived from “passive publishing, performance, and recorded music income streams”. This figure, it says, is “expected to decrease to between 40% and 45%” as additional control rights return to the company.

In aggregate, said HSF’s announcement today, Shot Tower’s $1.93 billion midpoint valuation reflects a 15.9X multiple of net royalty income across the portfolio (prior to deducting catalog bonuses).

Interestingly, that 15.9X multiple is lower than the multiple recently placed on US-based Chord Music by Universal Music Group, which invested $240 million to buy a 25.8% stake in Chord last month.

Chord is a useful proxy here: Like Hipgnosis Songs Fund, it owns a mixed portfolio of premium “passive” and “active” music assets; it’s also now worth somewhere in the same ballpark as HSF, with that UMG investment giving it a stated valuation of $1.85 billion.

Universal announced to its investors last week that it had valued Chord’s assets at an “effective 17X EBITDA multiple”.

Don’t look back in anger…

Hipgnosis Songs Fund shareholders may obviously be left wondering why UMG is willing to place a higher multiple on Chord’s assets (17X) than Shot Tower is willing to place on Hipgnosis Songs Fund’s assets (15.9X).

That, though, likely won’t be the biggest issue for HSF investors regarding the company’s new valuation.

In September 2023, the then-HSF board announced that it had accepted two bids to sell off portions of HSF’s portfolio.

The first of those bids, from an unnamed company believed to be Kobalt Music Group, was for a deal that would see the sale of around 20,000 “non-core” HSF assets for approximately $25 million. That deal was finalized in December, for a final price of $23.1 million.

The other bid accepted by the then-HSF board? That was much bigger: A $440 million offer from the private Hipgnosis Songs Capital (HSC) fund, via Hipgnosis Song Management (HSM), using Blackstone’s money, for 29 catalogs that cumulatively represented 19% of HSF’s value at the time (as per Citrin Cooperman).

You probably know the setup already, but Hipgnosis Songs Fund’s investment adviser – Hipgnosis Song Management (HSM) – is also the investment adviser for HSC. (HSM, founded by Merck Mercuriadis, is itself co-owned by Blackstone.)

“A 19% portion of HSF’s portfolio, subsequent to Shot Tower’s valuation, would be worth approximately $367 million – over $70 million less than the $440 million offered by Blackstone/HSC in September.”

That $440 million offer was, in a nutshell, a case of HSM selling assets from “one hand” to the “other hand” – while giving a real-world valuation boost to the portfolio (and probably the post-deal share price) of HSF.

The deal, though, never got done.

On October 26, Hipgnosis Songs Fund shareholders voted overwhelmingly against a “continuation” of HSF in its present form. At the same meeting, HSF shareholders also slammed the door on the $440 million Blackstone approach, rejecting the offer out of hand.

A bit of quick math shows why those same HSF shareholders might not love looking back at that decision in hindsight.

The $440 million offer from Blackstone/HSC/HSM in September, remember, was for a portfolio of assets that collectively comprised 19% of HSF’s assets by value.

HSF’s board said at the time that the offer represented a discount of 17.5% vs. the “fair value” of HSF’s portfolio at that point.

Now look what’s happened: According to Shot Tower’s midpoint valuation, the entirety of HSF’s portfolio is today worth $1.93 billion.

A 19% portion of that portfolio would therefore, subsequent to Shot Tower’s valuation, be worth approximately $367 million – over $70 million less than the $440 million offered by Blackstone/HSC in September.

(Worth clarifying that this is an approximation: Shot Tower’s valuation, remember, takes into account “passive” and “active” rights, so it’s difficult to know precisely how the ‘19%’ portfolio that Blackstone/HSC bid on would be valued under its formula.)

Could Blackstone be ‘licking its lips’?

Those HSF investors who dismissed Blackstone/HSC’s offer for the ‘19% portfolio’ as being under-priced or opportunistic, then, may today be feeling a little differently.

Christopher Brown, Head of Investment Companies Research at JPMorgan Cazenove, wrote as much in a research note today RE: the Shot Tower news.

As a result of the way HSF’s debt works, Brown noted, the company’s much lower new valuation will mean it now needs to sell catalogs to reduce the leverage hanging over its head.

(In technical terms, HSF’s gross leverage just increased from 28% of its Net Asset Value, or NAV, to 42%. It therefore needs to reduce its debt load, and sharpish.)

“Overall, the only silver lining of today’s announcement is that it increases the likelihood of a bid from HSM, backed by Blackstone, that would no longer be seen as low ball.”

Christopher Brown, JP Morgan

The proposed $440 million asset sale to Blackstone last year, wrote Brown, is “now looking like a missed opportunity”.

Brown added that if Blackstone/HSC/HSM were to pay HSF’s ‘NAV’ today to acquire the company’s portfolio, post-Shot Tower’s valuation, “Blackstone/HSM could acquire all or part of the portfolio at a lower valuation than the aborted [$440m] partial offer.”

Concluded Brown: “Overall, the only silver lining of today’s announcement is that it increases the likelihood of a bid from HSM, backed by Blackstone, that would no longer be seen as low ball.”

Credit: Chutima Chaochaiya/Shutterstock
That call option (again)…

A big question: Could another party beat Blackstone to the punch and snaffle the HSF portfolio, based on its new valuation?

Technically, yes – especially following recent moves from the new-look HSF board to incentivize companies to do so with a £20 million ‘bung’ offer (read more about that here).

The reason said ‘bung’ offer was even launched, however… takes us back to Merck Mercuriadis (aka Hipgnosis Song Management) and his ‘call option’ as HSF’s investment adviser.

As MBW has covered many times in the past, HSM/Mercuriadis’ ‘call option’ decrees that, should HSM ever be fired as HSF’s investment adviser, a clause would be triggered that enables HSM to acquire HSF for a pre-set sum.

That pre-set sum would be the higher of: (i) Hipgnosis Songs Fund’s public market capitalization; (ii) Hipgnosis Songs Fund’s ‘fair value’ as adjudicated by an independent valuer (currently Shot Tower Capital); or (iii) The price that any credible third-party is willing to pay to acquire HSF (i.e. a matching right).

“[The new Shot Tower valuation] increases the value of [Hipgnosis Song Management’s] call option, which is exercisable at portfolio fair value or above in the event of a higher offer from a third party.”

Christopher Brown, JP Morgan

Number (iii) is all-important here. It means that, as long as the call option stands and Blackstone is willing to match any approaches, no one would be able to ‘outbid’ HSC/Blackstone in an auction to acquire HSF’s assets.

As JP Morgan’s Christopher Brown said in his note today: “[The new Shot Tower valuation] increases the value of the manager’s call option, which is exercisable at portfolio fair value or above in the event of a higher offer from a third party.”

Robert Naylor, Chairman of Hipgnosis Songs Fund, commented today: “We are disclosing the valuation at this time given its material difference to valuations previously disclosed. The Board will provide further detail on this when the due diligence is complete.

“The Board remains focused on identifying all options to deliver shareholder value.”

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