MBW Explains is a collection of analytical options by which we discover the context behind main music business speaking factors – and counsel what would possibly occur subsequent. MBW Explains is supported by JKBX, a know-how platform that gives shoppers entry to music royalties as an asset class.
WHAT’S HAPPENED?
The drama at Hipgnosis Songs Fund isn’t letting up for the Holidays, it appears.
This morning (December 19), the corporate’s board – now led by Chairman, Rob Naylor– issued a assertion asserting that HSF would now not, as beforehand anticipated, be issuing its newest monetary outcomes right this moment.
As an alternative, the outcomes (overlaying the six months to finish of September 2023) are actually anticipated to be revealed someday earlier than the shut of December 31.
The explanation for the delay? In keeping with UK-listed HSF, it’s all to do with a recently-updated firm valuation from HSF’s official impartial valuer, US-headquartered Citrin Cooperman (CC).
The HSF board says this valuation from CC was “materially greater than the valuation implied by proposed and up to date transactions within the sector”.
HSF’s board notably factors to 2 transactions/would-be transactions as proof:
The proposed sale earlier this yr of belongings to Blackstone-backed Hipgnosis Songs Capital for USD $440 million (pre-costs) – or $417.5 million (post-costs) – a proposal that was in the end rejected by HSF shareholders;
The sale of 20,000 “non-core” songs from HSF’s portfolio to an unnamed purchaser (probably Kobalt Music Group) for $23.1 million, as introduced on December 11. That worth, in accordance with HSF’s board, represented a 14.2% low cost on Citrin Cooperman’s valuation of this portfolio as of September 30 (one thing we’ll come again to).
As a part of its announcement this morning, the HSF board took one thing of a swipe at its funding adviser, Merck Mercuriadis‘ Hipgnosis Music Administration.
After seeing Citrin Cooperman’s newest valuation and believing it to be too excessive, stated HSF, it then “sought recommendation from Hipgnosis Music Administration… which is majority owned by funds managed and/or suggested by Blackstone, on their opinion on the impartial valuer’s valuation.”
HSF’s board added: “Hipgnosis Music Administration… ultimately offered an opinion, which was closely caveated, such that the Board has issues as to the valuation of the Firm’s belongings in its interim outcomes.”
In response, Hipgnosis Music Administration issued its personal assertion right this moment: “Hipgnosis Music Administration has fulfilled its duties to [HSF] with respect to each the impartial valuation and preparation of the interim ends in a well timed and environment friendly method.
“However the Board’s choice to delay publication of the interim monetary statements, [we] will proceed to work in a constructive method to help the pursuits of the Firm and its shareholders.”
The oddest factor about all of this? Citrin Cooperman’s valuation of Hipgnosis Songs Fund is, in accordance with HSF’s personal firm documentation, appointed and overseen… by the HSF board.
See this line, in each annual and interim report from HSF thus far (bolding MBW’s personal): “Portfolio Impartial Valuer… Citrin Cooperman Advisors LLC, previously Massarsky Consulting, Inc., [is] appointed by the Board to independently worth the Firm’s Catalogues inside the Portfolio.”
To not point out this line in varied HSF firm stories to this point: “The [HSF] Board is in the end and solely answerable for overseeing the valuation of the Firm’s investments in music catalogues and has appointed [Citrin Cooperman] to carry out this specialist work.”
WHAT’S actually occurring?
It’s a good guess that Hipgnosis Songs Fund’s board – which final week appointed activist investor Christopher Mills as a non-exec Director – is making one thing of a ‘hidden’ assertion to shareholders with right this moment’s announcement.
It might be a coded try by HSF’s board to gnash enamel in the direction of HSM/Mercuriadis’ ‘name possibility’ – which, as MBW has identified earlier than, leaves the exec with the unique energy to comb in and purchase HSF’s portfolio underneath a number of completely different circumstances.
There are a number of clues in HSF’s newest public assertion to this finish, maybe together with its uncommon – to not point out conspicuous – point out of HSM being “majority-owned by funds managed and/or suggested by Blackstone“.
As well as, right this moment’s assertion can also be a transparent sign from the HSF board that it has comprehensible issues over the now-infamous ‘low cost price’ utilized by Citrin Cooperman to worth HSF’s portfolio (as MBW coated in depth via right here).
Citrin Cooperman continues to stay to an 8.5% low cost price in its valuations, regardless of rate of interest rises over the previous 12-18 months – and has lengthy refused to maneuver this 8.5% determine upwards to, say, 9% or 9.5%.
If Citrin Cooperman ever did elevate this low cost price, the impartial valuation of Hipgnosis Songs Fund’s portfolio would, in flip, immediately fall.
Price remembering: The HSF board has recognized about Citrin Cooperman’s newest valuation (as of September 30) for a minimum of the previous eight days.
We all know this as a result of, as talked about, on December 11, HSF introduced that the $23.1 million worth of an agreed HSF ‘non-core’ asset sale represented a 14.2% low cost vs. Citrin Cooperman’s newest valuation of the portfolio (i.e. the HSF board had seen this newest valuation).
But it took till right this moment (December 19) for HSF to alert its traders to its dissatisfaction with this valuation.
WHAT does JP Morgan make of all of it?
One of many closest watchers of Hipgnosis Songs Fund lately has been JP Morgan and its analyst Christopher Brown.
In a moderately damning word issued right this moment overlaying the delay within the publication of HSF’s outcomes, Brown wrote: “That is an early blow to the credibility of the brand new [Hipgnosis Songs Fund] Board, and casts additional doubt over the credibility of the impartial valuer, Citrin Cooperman.”
Brown added that he was “shocked” to see {that a} second valuation knowledgeable had not been drafted in to worth the HSF portfolio for the most recent interim outcomes, particularly as Kroll was appointed to contemplate the “reasonableness” of Citrin Cooperman’s assumptions for HSF’s earlier set of outcomes (to finish of March 2023).
Added Brown: “We predict the best resolution now for the [HSF] Board is to use an extra low cost price to the [Citrin Cooperman] valuation to replicate present market uncertainty, on the premise that it’s most likely too late to make use of one other valuer.”
Brown famous {that a} 0.5% rise in Citrin Cooperman’s low cost price (i.e. elevating it from 8.5% to 9.0%) would “cut back the honest worth of the [HSF] portfolio by 7.9%, which on a leveraged foundation is [approximately a] 10% discount in NAV [Net Asset Value]”.
Ought to HSF’s board go down this route, he famous, he anticipated “the [HSF] shares to weaken… on condition that this represents one other ‘unforced error’”.
“That is an early blow to the credibility of the brand new [Hipgnosis Songs Fund] Board, and casts additional doubt over the credibility of the impartial valuer, Citrin Cooperman.”
Christopher Brown, JP Morgan, on the HSF board assertion right this moment (December 19)
As well as, Brown expressed his shock that HSF requested HSM to “opine on the valuation given [HSM’s] battle of curiosity”.
His level: If HSM rotated and stated, “yep, HSF’s valuation is 25% too excessive, higher deliver it down”, then it will produce a brand new valuation for HSF that will enable Blackstone (or the Blackstone-controlled Hipgnosis Music Capital) to launch an acquisition bid for the HSF portfolio. (Or, a minimum of, part of that portfolio.)
The probably worth for this hypothetical Blackstone bid could be smaller than the failed $440 million ($418.5 million post-costs) bid that HSC (by way of HSM) made for a bit of the HSF portfolio earlier this yr.
“[It] is as much as the [Hipgnosis Songs Fund] Board to fulfill itself that the impartial valuer, whom it hires, is as much as the job, moderately than attempt to pin the blame on [Hipgnosis Songs Management].”
Christopher Brown, JP Morgan
Concluded Brown: “[It] is as much as the [Hipgnosis Songs Fund] Board to fulfill itself that the impartial valuer, whom it hires, is as much as the job, moderately than attempt to pin the blame on [Hipgnosis Songs Management].
“Our view is {that a} breakdown within the relationship between Board and supervisor wouldn’t be optimum for maximising shareholder worth.”
Brown additional famous that JP Morgan would “not be shocked to see Citrin Cooperman resign, having been very publicly undermined by the [HSF] Board right this moment”.
JP Morgan retained its ‘obese’ ranking in opposition to HSF’s share worth “despite one more [HSF] personal objective”.
A Closing thought…
As talked about within the opening sentence of this text, there may be loads of drama surrounding HSF proper now – from the ‘discontinuation vote’ we noticed on the firm in October, via to a latest lawsuit launched in opposition to Hipgnosis Songs Fund by a former enterprise accomplice of Merck Mercuriadis.
But, amongst the entire noise, what’s going to probably most curiosity HSF’s traders (together with the likes of Investec Wealth & Funding, Aviva Traders, and BlackRock) is the continuing underlying business efficiency of the agency’s copyrights.
How are Hipgnosis Songs Fund’s belongings performing vs. the market? How is the corporate’s ‘premium-only’ acquisition technique holding up in opposition to its promise of development “uncorrelated” to different industries? And what does all of this counsel in regards to the ongoing development potential of the HSF portfolio vs. the multiples that Merck Mercuriadis paid to amass it?
Such questions will solely be answered when Hipgnosis Songs Fund’s board elects to launch the corporate’s six-monthly monetary outcomes to finish of September 30.
Crucial KPI inside these outcomes, in MBW’s view: the corporate’s Professional-Forma Income, and the way it compares, like-for-like, vs. the earlier yr’s equal interval.
Hipgnosis Songs Fund’s ‘pro-forma income’ as of its prior-released outcomes as much as March 30, 2023
Within the meantime, again within the ‘actual world’ of the music biz, HSF is definitely having fun with fairly a fanciable This autumn.
The corporate is benefitting from its cuts on hit albums together with Taylor Swift’s 1989 (Taylor’s Model), by way of its acquiredJack Antonoff catalog, in addition to Swift’s Lover (by way of its acquiredJoel Little catalog).
HSF’s investments in seasonal Christmas ‘evergreens’ proceed to repay too, with cuts on Michael Buble’sChristmas album and – most famously – a share of Mariah Carey’s perennial megahit, All I Need For Christmas Is You.
