As if investors in Hipgnosis Songs Fund, the London-listed owner of music rights from artists including Blondie to Neil Young, weren’t already furious, Monday brought fresh fuel for rebellion. The fund will skip dividends until at least its next financial year to preserve cash; that’s on top of the cancellation of the last quarterly distribution.
The infuriating detail is that the blame is being pinned on an increase this year of $23m to $68m (£18.5m to £55m) in so-called “catalogue bonuses” – a form of performance-related payment dictated by past acquisition agreements. Since beating performance hurdles should, if the terms of a deal are crafted well, be good for the acquirer, not just the seller, Hipgnosis’s shareholders may reasonably wonder why the mechanics of these payments wasn’t previously spelled out.
Welcome, though, to the mysterious world of music rights, where headline financial details of acquisitions, never mind add-ons, are rarely disclosed. The result is a class of “alternative” asset where an awful lot of trust is placed in the board and its investment manager. Hipgnosis is a case study in what happens when that trust evaporates.
Last month shareholders voted down two proposals. The first was to sell a fifth of the catalogue of 65,000 songs for $440m and looked dead from the moment it was announced because the discount to book value was an ugly 24%. To compound matters, the proposed buyer was the private equity firm Blackstone, which, like the Hipgnosis fund, has Merck Mercuriadis as its investment manager. The music rights industry is a small world, but the potential for conflicts of interest was obvious.
The second vote on “continuation” was more significant because rejection amounted to an order to the board to come up with a new strategy for the fund – obvious options being a wind-down or a sale of all or part of the portfolio. The motivation for the demand for radical action was entirely understandable; versus a book value of about 150p a share, or about $2.2bn, the fund’s market price has been drifting around the 70p mark.
The expectation at the time was that a new-looking Hipgnosis board (new-looking because several figures were voted off or resigned) would have until the end of next April to come up with some new ideas. That timetable now looks far too leisurely given the extension of the non-payment of dividends. The whole investment appeal of these music rights funds is supposed to be the reliable income via the steady proceeds of royalty payments. If investors can’t even count on dividends while they wait, the endgame has truly arrived.
The new-look board needs to skip a few tracks and get on with the job of minimising pain for investors. If that involves ditching Mercuriadis and his firm as the fund’s manager, it should set out the cost of making it happen. And, since an outright sale of the portfolio looks the cleanest exit, it needs to get a handle on what could be achieved in the open market. But that should not require six months of navel-gazing beforehand.
