Jefferies analysts Matthew Hose and Fiona Huang have assessed various outcomes ahead of the Hipgnosis Songs Fund continuation bid.
As of this morning (19 September), shares in the music royalty investment trust are down 12% since last Thursday’s announcement of the sale of a fifth of its portfolio to the Hipgnosis Songs Capital private fund.
The Jefferies analysts said the share price drop suggests the market is “seemingly unhappy” with the terms of the deal.
“The obvious corollary is that shareholders may now vote against this related party transaction, but the fund also has a forthcoming continuation vote due to be held at the AGM that will run concurrently with the EGM on the transaction,” they said.
“As such, it is worth assessing how this could play out and where the various combinations of vote result would leave Song.”
Range of scenarios
If approved, the $465m deal announced last Thursday would see a fifth of its portfolio shift to the Blackstone-owned private vehicle. At the same time, the trust is also subject to a continuation vote due by the end of the year.
Alongside the asset sale, Hipgnosis Songs’ board announced a range of proposals which it believes will act as a catalyst for a share price re-rating ahead of the continuation vote, including a share buyback programme of up to $180m.
In the event shareholders vote against both the asset sale and continuation, Hose and Huang said: “In our view, the only real option here would be for the board to trigger the manager’s termination option, allowing the manager to acquire the entire portfolio at fair market value as determined by an independent valuer.
“Establishing this ‘fair value’ will be fundamentally key though and may necessitate using a different valuer to the incumbent Citrin Cooperman. We feel it unlikely the manager would fail to take up the option given the financial backing of Blackstone and the existing relationships with artists and songwriters, although if it did decline the option, the board would then be free to engage in an open sale process.”
In the case of a vote against the asset sale and for continuation, they added: “Assuming the asset sale has the same 50% acceptance threshold as the continuation vote means the shareholder base is likely to vote in the same manner for both votes. However, there is still the risk of a strange overall result should individual shareholders vote in different ways, or abstain from one vote, but not the other.
“In this scenario, voting against the asset sale, but for continuation, would leave the fund back where it started, so still needing to do something to address the wide discount to NAV and unsustainable gearing. That said, this could engender the board to attempt to agree to an asset sale on better terms.”
The duo said a vote for the sale and against continuation would be “the strangest outcome” as the asset sale would “arguably set diminished expectations” for the sale of the remainder of the portfolio.
In terms of other outcomes, Hose and Huang concluded: “There are two other outcomes that could occur before the votes are scheduled to take place. First, the ‘go shop’ provision could be activated via a third-party bid for the assets, although this is unlikely given the matching right of the private fund. More likely is the second outcome that shareholder pressure leads to the terms of the asset sale being revised.”
Bid to win over shareholders
The announcement of the portfolio sale and buyback programme has been seen as a bid to win over shareholders ahead of the looming continuation vote, expected by the end of December.
Reacting to the measures, QuotedData analysts said: “The board had promised action prior to this announcement ahead of their upcoming continuation vote and the details provided are certainly a positive step. Shareholders and analysts had been calling for Hipgnosis to sell some of its catalogue and use the money to fund buybacks to narrow the discount and possibly to pay down some debt and these measures have all been announced.
“The sale also helps validate the operational NAV calculation and the discount rate which has been an area of debate in recent months. However, it would have been nice, and quite possibly beneficial to shareholders, to see a third-party offer for these assets, which would also have given greater credibility to the NAV calculation and discount rates. Unfortunately, this doesn’t seem to have been explored although it is perhaps not a surprise that Blackstone wants to keep control of these assets.
“The first disposal purchase price reflects a premium of 51% to its valuation implied by the company’s 30-day average market capitalisation up to 13 September 2023, although it is a discount of 17.5% to the fair value of the first disposal portfolio as at 31 March 2023, which looks cheap when compared to Concord’s purchase of Round Hill Music which came at discount of 11.5% (the premium to the closing share price was also higher at 67.3%). On summary, we think shareholders will view these proposals as progress although the reaction so far looks lukewarm, with the share price up 0.65% so far today.”
However, Winterflood analysts cast doubt over whether the board action is enough for shareholders to vote in favour of continuation.
According to data from FE Fundinfo, the trust is down 23.8% over the last three years.
The analysts said: “If reinforcing investor confidence in portfolio valuations is the aim, a related party transaction is rarely the solution. However, we believe that this transaction demonstrates a few relevant dynamics. Clearly Hipgnosis Song Management continues to value these catalogues highly, and it is willing to put capital to work in support of that notion. Hipgnosis Songs Capital was always the most likely suitor for the portfolio painstakingly compiled by its manager, and in the event of a take-private deal, this may suit shareholders of the listed vehicle just fine.
“In the absence of a comprehensive cash offer (such as announced by Round Hill Music last week) though, it would seem that an external offer close to NAV would be the strongest argument in favour of continuation at the AGM, even if this is subsequently matched by the private fund. Hence the creative structure of this deal, which de facto puts a floor under the valuation of these catalogues and attempts to create a market ahead of the AGM.
“The question remains whether the combined impact of this transaction and a buyback equivalent to 16% of market cap will convince shareholders to support continuation; in the absence of further developments we would not be surprised to see votes split by a relatively fine margin.”
Bids aplenty for music royalty trusts
The Hipgnosis asset sale announcement followed on from Round Hill Music – the only other constituent in the AIC music royalty trust sector – who announced on 8 September it had received a bid for the whole company at a 67% premium to its share price and 12% discount to net asset value (NAV) from US-music firm Concord.
In a blog post, Dan Cartridge, assistant fund manager at Hawksmoor Investment Management said the market was surpised by the bid for Round Hill.
“Frustratingly, we were not – and are not – owners of Round Hill Music, but in recent months have re-established a position in the asset class via Hipgnosis Songs,” he said.
“We previously owned both Round Hill and Song for their equally attractive portfolios of songs but sold both in 2022 due to the competition for yield from more traditional sources as interest rates rose dramatically during that year. This increase in risk-free rates also raised question marks regarding the veracity of song catalogue valuations, placing further downward pressure on the share price.”
He added: “Key to the original attraction to the song royalty asset class was the growth prospects for the overall music market driven by streaming growth in the long term, and potential for an increase in the piece of the pie that artists and writers enjoy.
“Round Hill has an attractive portfolio, with a good vintage out of the revenue decay phase – newer songs have a sharp revenue decay phase in the first three to five years after an initial surge of use rolls off, older songs don’t suffer this – while Song owns more iconic and well-known assets with 25% of the songs in Spotify’s billions club (songs with over 1 billion streams on the platform) and 11% of Rolling Stone’s ‘The 500 Greatest Songs of All Time’.
“The thesis was backed up by both sets of recent results clearly demonstrating the revenue growth credentials. Both trusts were trading at a very wide discount to its NAV of 40-50% in recent months but we ultimately decided to reintroduce Song in May this year because it had an obvious catalyst to close the discount to NAV, a looming continuation vote due by the end of this year.”
While it is undoubtedly an uncertain time for the music royalty trust sector, Hawskmoor’s Cartridge believes both announcements are evidence of a changing investment trust sector as a whole.
Quoting song names from Hipgnosis Song’s Hipgnosis’ Billion Streamers playlist, he added: “Boards are no longer hiding in a Castle on the Hill, riding the easy wave of premiums and new issues that characterised the trust sector for over a decade through to the end of 2021.
“A far more proactive stance is required, and is being taken across the sector, from private equity (Pantheon’s £200m buyback programme) to renewables (Ecofin US Renewables Infrastructure’s strategic review), to equity (Nippon Active Value fund merging with abrdn Japan Investment Trust and Atlantis Japan Growth Fund), to property (Civitas bid amongst others earlier this year) and now music royalties. It is a Sign of the Times that the sector must change, and change it is.”