Music stops at Hipgnosis
The music-royalties trust is ripe for takeover, with two rms keen to scoop it up. Its business model is no longer on song, however. Matthew Partridge reports
Shares in Hipgnosis Songs Fund have soared after private-equity group Blackstone announced that it would seek to derail Concord Chorus’s proposed $1.4bn takeover of the UK-listed musicrights investment trust, says Daniel Thomas in the Financial Times. The fund gives investors access to the income from song royalties. While the board had previously backed Concord’s offer of $1.16 a share, it is now “minded” to back Blackstone, after it came in with a higher bid of $1.24 per share. This looks set to trigger a “bidding war” for Hipgnosis, “which has been through a tumultuous period [amid] questions over its valuations, debt levels and governance”.
Investors may not “get to see a battle of the bands”, says Alistair Osborne in The Times. Blackstone could make any Concord deal “a legal nightmare”. It is the majority owner of Hipgnosis Songs Management, run by the listed fund’s founder Merck Mercuriadis, which has “the right to buy Hipgnosis’s assets – broadly its 65,000 songs – at a price set by an independent valuer”. Hipgnosis claims that Mercuriadis’s conflicts of interest mean that they can fire him and cancel the option. But there is the risk that if Concord wins the bid, “it could theoretically go on to lose the assets to a Blackstone-controlled business”.
The end of a great story
The fact that an “honourable escape route” is the best that Hipgnosis’s investors can hope for is a pity, says Alex Brummer in the Daily Mail, as it was based on a “great story”. Mercuriadis’s “long record in the world of popular music” gave him access to the big players, while their songbooks “offered a new asset class”. Sadly, while Hipgnosis “was in the forefront of signing up artists such as Shakira, Jay-Z and Justin Bieber”, the giants of the industry “recognised there was value in royalties”, and the space quickly “became more crowded”. As a result, fund manager Mercuriadis “found himself paying ever higher prices for songbooks and the economics fell apart”.
A crowded market wasn’t the only thing that doomed Hipgnosis, says Pierre Briançon for Breakingviews. The era of “higher-for-longer interest rates” has lowered the value of music rights, as it shrinks “the net present value of future cash flows from catalogues often stretching decades into the future”. Indeed, Hipgnosis “reckons a 0.5% increase in the discount rate used in those calculations knocks 8% off its worth”. No wonder an independent review forced the firm to slash the value of its assets.
The sensitivity of music rights to interest rates, as well as the “industry-wide lack of transparency over the price at which catalogues are bought and sold”, suggest that this type of alternative asset is “ill-suited to public markets”, says Nils Pratley in The Guardian. Of course, it would be a shame to write off song royalties completely, as a “broad and constantly refreshed portfolio of music rights should be able to provide a stable source of income”. However, pension funds, “with multi-decade investment horizons”, seem “more natural” owners than a listed company.