Investing in Hipgnosis Songs Fund (SONG) was meant to have been a no-brainer. Sadly, that has been far from the truth.

The investment trust owns the rights to certain popular songs. It gets paid every time these songs are featured in a film, TV show or advert; played on the radio or in a public place or streamed.

By proactively finding ways to earn more money from the songs, Hipgnosis should have been able to deliver a growing stream of dividends and capital gains to shareholders. It’s not worked out that way. The shares are trading below the price at which it joined the stock market five years ago and the dividend hasn’t gone up since October 2020.

Corporate governance has been questionable ever since the trust floated, and investors yearn for more transparency over the acquisition of royalties and how extra money is being earned from owning them.

The sharp rise in interest rates had a negative impact on long duration assets, of which Hipgnosis Songs Fund is one. Higher rates mean the future value of cash flows is less when discounted back to the present, hence why Hipgnosis’ shares fell when central banks started raising rates last year.

Hipgnosis’ investment adviser HSM found it couldn’t raise more funds because the share price had fallen well below net asset value. Raising new equity would have destroyed value for existing shareholders so HSM found a new way to keep buying music royalties, albeit not involving the investment trust.

Blackstone bought a stake in the manager and set up a private fund called Hipgnosis Songs Capital, appointing HSM as adviser.

Investors in Hipgnosis Songs Fund were understandably confused given the similarity in name to their investment trust. They started to get annoyed, particularly as it looked like HSM was more interested in its work for Blackstone than the trust.

Pressure was put on HSM to revive shares in Hipgnosis Songs Fund and the latest solution is to sell some of its music catalogue to Hipgnosis Songs Capital. While the share price briefly shot up on the news, there were some glaring red flags.

First, the sister fund is paying a 17.5% discount to the March 2023 value of the portfolio. Why is the buyer getting such a good deal? Surely something like the 11.5% discount Concord is paying to buy Round Hill Music Royalty Fund (RHM) is more of an accurate benchmark?

Second, the transaction has been backdated to 1 January 2023 with Hipgnosis Songs Fund handing back $15.3 million to the purchaser, while also retaining its liabilities for contingent bonuses. Stifel analyst Sachin Saggar believes the acquisition discount could be 22% when adjusting for these factors.

The market has had time to digest the deal terms and it’s notable that the share price has lost all the initial gains on the announcement (and more). So, the transaction has done nothing to revive the stock so far. The catalysts are likely to be share buybacks and debt reduction funded by the proceeds of the deal.

First up, a continuation vote for Hipgnosis Songs Fund will be held at the company’s AGM, no later than 25 October. Shareholders could decide they’ve had enough and might get more money back if the trust was liquidated. We would not be surprised if the vote went that way.

‹ Previous2023-09-21Next ›