Hipgnosis Songs (SONG ) is asking investors to stump up another £150m as the music royalties gold rush continues, but the fund indicates it will then press pause on its high-tempo expansion for a year.
The £1.3bn London-listed investment company, set up by former Beyonce manager and Sanctuary Records label boss Merck Mercuriadis in 2018, is seeking to issue around 124m shares at 121p, although its board has the option to raise more than the target.
The issue price represents a 2.4% discount to the closing share price of 124p on 15 June, the day before the raise was announced, and a 2% premium to Hipgnosis’s latest adjusted net asset value (NAV) of 118.57p per share. The proceeds are earmarked for investment into a ‘substantial pipeline’ of songs.
It follows a deal to buy the Red Hot Chili Peppers’ catalogue, Variety and other media outlets reported last month, though this has not been confirmed to the market.
With Hipgnosis’s debts teetering close to their maximum allowed level, analysts said the placing came as a little surprise. But given the fund’s continued growth and succession of equity raises – the last hauling in £75m in February – it delays the point at which investors can judge whether the revenues generated by the portfolio are actually living up to expectations.
The latest NAV estimate is based on the 31 March operative NAV per share of $1.6829, adjusted for the effect of sterling strengthening, accrued income and dividends paid since.
That end-of-March portfolio value was published in a trading update earlier this month, showcasing strong performance over the previous 12 months as streaming grew in popularity during the coronavirus pandemic and there were a number of blockbuster deals in the music royalties asset class, including Bob Dylan selling his back catalogue to Universal Music Group for a reported $300m.
A bumper pandemic year
The acquisitive Hipgnosis spent nearly $1.1bn over the year on rights to songs by artists from Neil Young (pictured) to Shakira, more than doubling the size of its portfolio to around $2bn across 138 catalogues. More deals have followed since, most recently for the catalogue of producer and musician Joel Little, who has worked with Lorde and Taylor Swift.
In the year to 31 March, Hipgnosis’s NAV per share was up 11.3% in dollars – which SONG is now denominated in – representing a 15.7% total return. A significant contributor was the reduction in the ‘discount rate’ used to calculate the present value of future royalties at the time of interim results from 9% to 8.5%.
Other positive drivers included the accelerated use of streaming and expected revenues from ‘emerging digital plaforms’ such as TikTok and Peloton.
The unaudited trading update, which will be follow by annual results later this month, reported that during 2020 there was 18.5% growth in paid music subscriptions to 443m users globally. That growth was reflected in royalties generated by the funds’ catalogues, with overall streaming income increasing by 18.4% in the second half of the financial year from the previous six months, and by 24.3% across steady state catalogues, where no decay from peak earnings is expected.
The variance against forecasts – a new performance measure being used – was -2.8% over the year, meaning revenues across the portfolio were 2.8% lower than those forecast from catalogues at acquisition. That was ascribed to a shortfall in ‘performance’ income, from sites like shops and bars as well as livee music.
The year also saw the ‘vintage’ profile of the portfolio shift away from newer to older songs. While a year before more than two thirds of the portfolio by value was less than 10 years old, now more than 60% of the catalogue is 10 years or older. £254m rival royalties fund Round Hill (RMR ) had contended when it listed in November last year that its older, more classic catalogue represented a more proven bet.
At the end of March, Hipgnosis drew $90m under its revolving credit facility, taking its gross debt to $577m – or 32.8% of NAV at the time – and net debt to $438m. That represented an accidental breach of the fund’s 30% limit on gross leverage. On 5 April, $50m was repaid, rectifying the temporary breach.
Broker Stifel said the latest raise was ‘not surprising’ given that, after that repayment, gross leverage was $527m, or 29% of NAV. With the Red Hot Chili Peppers catalogue having a reported value of more than $140m, that made an equity raise the only option.
‘We view the recent breach of the leverage facility as a soft negative – as while these things do occur, you would not normally expect it to happen on a measure of the amount drawn relative to NAV. This appears to flag some issues around the internal systems and controls,’ said analyst Sachin Saggar.
‘As we have commented previously, if the capital raise meets its £150m target, it will delay the markets ability to analyse the company in a period of stabilised earnings where cost to fair value uplifts are lower and right to income has a less meaningful impact.’
Broker Numis said it understands the commitment not to raise more cash for around 12 months reflects the manager seeking to focus on song management of the existing portfolio and seeking to improve the rating of Hipgnosis’s shares, which currently trade at a 5.6% premium to NAV.
The placing closes on 6 July.
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