New proposals from Hipgnosis Songs a positive development

Hipgnosis Songs Fund (SONG) announced a number of proposals which it believes will act as a catalyst for a re-rating of the company’s share price. These include:

• Catalogue sales for aggregate gross consideration of $465 million;
• Share buy back programme of up to $180 million;
• Repayment of $250 million drawn under the company’s revolving credit facility (“RCF”); and
• Introduction of additional, lower investment advisory fee tiers.

These proposals are subject to, among other things, shareholder approval of all required resolutions at an Extraordinary General Meeting and the 2023 Annual General Meeting which are both expected to be held no later than 25 October 2023.

The board has outlined the strategic rational for the proposals, outlined below.

[QD comment: The board had promised action prior to this announcement ahead of their upcoming continuation vote and the details provided are certainly a positive step. Shareholders and analysts had been calling for Hipgnosis to sell some of its catalogue and use the money to fund buybacks to narrow the discount and possibly to pay down some debt and these measures have all been announced. The sale also helps validate the operational NAV calculation and the discount rate which has been an area of debate in recent months. However, it would have been nice, and quite possibly beneficial to shareholders, to see a third-party offer for these assets, which would also have given greater credibility to the NAV calculation and discount rates. Unfortunately, this doesn’t seem to have been explored although it is perhaps not a surprise that Blackstone wants to keep control of these assets. The first disposal purchase price reflects a premium of 51% to its valuation implied by the company’s 30-day average market capitalisation up to 13 September 2023, although is a discount of 17.5% to the fair value of the first disposal portfolio as at 31 March 2023, which looks cheap when compared to Concord’s purchase of Round Hill Music which came at discount of 11.5% (the premium to the closing share price was also higher at 67.3%). On summary, we think shareholders will view these proposals as progress although the reaction so far looks lukewarm, with the share price up 0.65% so far today.]

Strategic rationale

The board and the investment adviser believe that, over the last 18 months, the company’s share price has not reflected the fundamental value of the company.

A consultation with major shareholders in Spring 2023 confirmed that whilst shareholders continued to believe in the Company’s significant long-term growth opportunity, a proactive approach to addressing the current share price, including a meaningful share buy back programme and reduction in the Company’s revolving credit facility drawings, was important.

These disposals are of the smallest magnitude possible that would provide the required capital to execute on this strategy, whilst ensuring that the ongoing investment case for Hipgnosis Songs Fund remains intact by protecting the strength of the remaining portfolio.

The Board and the Investment Adviser continue to believe that the best way to maximise long-term shareholder value is to buy, hold and actively manage culturally important assets that will deliver income and capital growth over time. Furthermore, they believe that the Company’s long-term value has yet to be fully realised.

This opportunity for growth was demonstrated in the financial year ended 31 March 2023 when the Company reported its best like-for-like income growth to date of 12.1% year-on-year. The Board and the Investment Adviser are confident of showing strong further growth as the Company benefits from the structural tailwinds of the continued monetisation of music consumption and the Investment Adviser adds value through active Song Management.

Proposed transactions

First portfolio

Firstly, the company has agreed the sale of 29 music catalogs for cash consideration of $440 million, reflecting a multiple of 18.3x historical Net Publisher Share, to Hipgnosis Songs Capital, a partnership between Hipgnosis Song Management and funds managed and/or advised by Blackstone (the “First Disposal”). The First Disposal is expected to realise a total net return of 44% over a 3 year weighted average life of ownership.

The First Disposal Portfolio was designed to protect the strength of the remaining portfolio after completion of the First Disposal, as follows:

• Hipgnosis Songs Fund will retain 81% of its existing portfolio by Fair Value with an increased focus on older vintages (First Disposal Portfolio average vintage being 2008, compared to existing portfolio average of 2003);
• The remaining portfolio is expected to deliver strong income growth over the medium term;
• The remaining portfolio will have an increased concentration of culturally important and successful songs, with the Company retaining an interest in 47 of Rolling Stone’s 500 Greatest Songs of All Time (existing portfolio has 52 of these songs) and 85 Spotify Billions Club (existing portfolio at 12 September 2023 has 106/473); and
• Hipgnosis Songs Fund will retain its ownership in seven of its ten largest catalogues.
• All catalogues would continue to be managed by Hipgnosis Song Management, maintaining the goodwill of Artists and Songwriters and enabling the Investment Adviser to maximise income by Song Management of the Company’s remaining portfolio.

The First Disposal purchase price reflects:

• A premium of 26% to acquisition price of the First Disposal Portfolio;
• A premium of 51% to the valuation of the First Disposal Portfolio implied by the Company’s 30-day average market capitalisation up to 13 September 2023; and
• A discount of 17.5% to the fair value of the First Disposal Portfolio as at 31 March 2023.

The First Disposal is conditional upon, inter alia, the approval of the sale by independent shareholders at the EGM and the approval by shareholders of the continuation resolution at the company’s 2023 AGM.

On the basis of the terms agreed with Hipgnosis Songs Capital, the Company expects to pay approximately $6.7 million in corporation tax. By use of the Company’s tax losses, it has been possible to mitigate the majority of the Corporation Tax which would otherwise have been payable on the accounting profit on the sale of these assets.

Second portfolio

Secondly, the Company has agreed in principle, subject to completion of legal documentation and the consent of the Company’s lending banks, to sell a portfolio of non-core songs (the “Second Disposal Portfolio”) for a consideration of approximately $25 million (the “Second Disposal”).

The Second Disposal Portfolio songs were acquired as part of Kobalt Fund One and their eventual sale was part of the Company’s acquisition strategy, as they were considered non-core as the Company does not have perpetual ownership rights or the songs require ongoing accounting and reporting obligations that take up significant bandwidth which can be better focused on active Song Management.

Use of proceeds

The company intends to use the net proceeds of the disposals to establish a share buy back programme of up to $180 million; repay $250 million of the company’s drawings under its revolving credit facility; and enhance financial flexibility. Given the substantial share price discount to fundamental value in recent months, share buy backs enable the company to invest further into the remaining portfolio at a material discount to its fundamental asset value.

Investment Advisory Agreement

In addition, the Company has agreed an amendment to the Investment Advisory Agreement in place between the company and the investment adviser such that, subject to completion of the First Disposal to Hipgnosis Songs Capital, the calculation of the annual advisory fee payable by the company to the investment adviser will be amended to include additional lower tiers, as are set out in the Amendment to Investment Advisory Agreement section below. This is expected to provide the company with lower ongoing operating costs whilst maintaining the Investment Adviser’s alignment with the Company’s share price performance.

Related party considerations

The Investment Adviser is majority owned by funds managed and/or advised by Blackstone, which together also own the majority of interests in Hipgnosis Songs Capital, the proposed purchaser of the First Disposal Portfolio. The proposed sale of the First Disposal Portfolio to Hipgnosis Songs Capital therefore constitutes a related party transaction for the purposes of Listing Rule 11 and is conditional upon, among other things, the approval of the company’s independent shareholders at the EGM to be convened for that purpose.

Given that Hipgnosis Songs Capital and the Investment Adviser are under common control and, additionally, the Investment Adviser acts as investment adviser to Hipgnosis Songs Capital, the Board put in place appropriate governance arrangements and information barriers to ensure the continued availability to it of a segregated team of the Investment Adviser to consider and advise on the First Disposal, none of whom were available to or have any financial interest in Hipgnosis Songs Capital.

In addition, the Company notes that Mr Mercuriadis, and certain employees of Hipgnosis Song Management, have disclosed to the Board that they hold a minority interest in the share capital of Hipgnosis Songs Capital.

Go-Shop provision

The terms of the First Disposal include a “Go-Shop” provision, pursuant to which the board is entitled to solicit alternative offers for the First Disposal Portfolio for a period of 40 days from the date of this announcement. Hipgnosis Songs Capital has the right to match any Superior Proposal (as defined below). The Company may terminate the agreement if it receives and settles the transaction documents in respect of a Superior Proposal and Hipgnosis Songs Capital does not match that proposal within 5 Business Days of having been notified by the company. On any such termination a fee of $6.6m will be payable by the Company to Hipgnosis Songs Capital. In determining whether to exercise any termination right the Board will act in the best interests of shareholders including considering whether any such superior proposal, if completed, would result in higher aggregate cash net proceeds and deliver greater long-term value to the company’s shareholders.

Full details of the terms of the Go-Shop provision are set out in the Principal Terms of the First Disposal section below. Shareholders will be notified via a regulatory information service of the outcome of the Go-Shop process in due course and in any event before the EGM and 2023 AGM are held. In the event a Superior Proposal is received during the Go-Shop period the Board expects it will be necessary to adjourn the EGM and 2023 AGM, no later than 30 November 2023.

Background to the recommendation

The board and the Investment Adviser believe these proposals provide an attractive opportunity for the Company to re-rate its share price and strengthen its platform to deliver future income and capital growth.

The Board considers the proposals described in this announcement and the passing of the Asset Sale Resolution, the Continuation Resolution and each of the other resolutions to be proposed by the Board at the 2023 AGM to be in the best interests of the Company and its shareholders taken as a whole. Accordingly, the Board intends to unanimously recommend that shareholders vote in favour of these resolutions at the EGM and the 2023 AGM, as appropriate, in due course.

The Company intends to publish a circular which is expected to be posted to Company shareholders no later than 27 September 2023 which will include the notice convening the Extraordinary General Meeting, expected to be no later than 25 October 2023, to consider and, if thought fit, to pass, the Asset Sale Resolution. The circular will also contain a notice convening the 2023 AGM for the same date.

The Board and the Investment Adviser are committed to on-going engagement with shareholders on the Company’s future strategy, with a second Continuation Vote scheduled to be held at the Annual General Meeting in 2028.

J.P. Morgan Cazenove is acting as sponsor and financial adviser to Hipgnosis Songs Fund in respect of the First Disposal.

Merck Mercuriadis, CEO and Founder of Hipgnosis Song Management and Founder of Hipgnosis Songs Fund said:

“Earlier this year we initiated consultations with shareholders, in contemplation of the Continuation Vote and our concerns that the true value of our iconic songs was not being reflected in our share price. It was clear that shareholders shared our belief in the continuing long-term opportunity of Hipgnosis Songs Fund and wished to see a significant share buy back programme and reduction of our leverage in order to deliver a re-rating in the share price.

“The transactions announced today allow us to execute on that strategy and reflect our determination to deliver immediate shareholder value and enhance the Company’s position to deliver long-term exceptional returns and capital growth through our investment strategy of ‘buying, holding and actively managing’ a major portfolio of iconic songs as they benefit from the continued growth of streaming.

“I’m delighted that through this transaction with Hipgnosis Songs Capital, not only are we able to execute the strategy of share buy backs and reducing leverage but also give clear transactional evidence, alongside other recent transactions in the market, of the current realisable value of the Company’s catalogues to help investors understand and have confidence in the Company’s asset value. The purchase price of the sale of catalogues to Hipgnosis Songs Capital realises a total return of 44%, which validates our investment strategy despite the current economic challenges.

“In transacting with Hipgnosis Songs Capital, and reflecting both my own and Hipgnosis Song Management’s relationship with Hipgnosis Songs Fund and Hipgnosis Songs Capital, our responsibility and duty of care to Hipgnosis Songs Fund’s shareholders has been of paramount importance. For that reason, our focus throughout has been to execute a strategy designed to re-rate the share price while protecting the quality of the remaining portfolio, which going forward will have a greater focus on older vintage songs and retain the majority of the Company’s largest catalogues. An important part of that responsibility has been to include a “Go-Shop” provision which importantly Hipgnosis Songs Capital would have the right to match. This ensures the highest level of corporate governance and shareholder protection.

“Equally importantly, our Company’s success has been built upon our ethos and commitment to Songwriters to be conscientious custodians of their songs. With these deals, Hipgnosis Song Management will continue its management of all our catalogues acquired from Songwriters, Producers and Artists by Hipgnosis Songs Fund ensuring we maintain our ethos and protect Hipgnosis’ unique ability to work with Songwriters, Producers and Artists to maximise income and capital growth. The importance of this is understood and acknowledged by our shareholders.

“I believe these deals will deliver immediate value for shareholders through a re-rating of the shares and position Hipgnosis Songs Fund to deliver superior returns to shareholders over the medium and long-term.

“The Company recently delivered the best like-for-like results in its history and is in a perfect position to capitalise on the demonstrated pricing power of the DSPs, the successful passing of CRB III and CRB IV and songwriters being paid at the highest rates ever in the streaming era as we see more than a billion paid subscribers to music streaming services in sight. All this gives us great confidence for the future.

“With the support of our shareholders in the continuation vote, Hipgnosis Songs Fund will move forward stronger than before with a portfolio of culturally significant, iconic songs that will be listened to for decades to come, providing long-term resilient income streams and the potential for significant capital growth.”

Andrew Sutch, Chairman of Hipgnosis Songs Fund said:

“As a Board, we have been clear for some time that the Company’s share price does not fully reflect the value of Hipgnosis Songs Fund’s Portfolio. Having consulted with many of our largest shareholders, considered a wide range of options and taken independent advice we are confident the proposals set out today provide a compelling opportunity to deliver immediate shareholder value whilst protecting our ability to deliver superior returns over the medium term.

“These proposals will enable the Company to instigate a substantial share buy back programme and reduce its debt whilst enhancing the quality of the remaining Portfolio and ensure we maintain the goodwill of Songwriters and Artists, helping the Investment Adviser maximise future shareholder value through Song Management.

“Importantly, whilst the Company has been consistent in its view that the best way to realise the long-term value from its assets is to hold in perpetuity, given the Company’s recent share price, the sales of a small proportion of the Company’s portfolio will enable the launch of a material share buy back programme which we believe will result in a significant re-rating of the Company’s share price and enables the Company to invest further into its remaining portfolio at a material discount to its fundamental asset value.

“With the sale price of the First Disposal, Hipgnosis Songs Fund would be realising a 44% total return for shareholders, highlighting the continuing opportunity of the remaining portfolio in the future.

“At every step, the Board has been focused on acting in the best interests of the Company’s shareholders. Therefore, noting the related party aspect of the proposals, we have ensured strong corporate governance controls and shareholder protections have been core to the First Disposal, including a Go-Shop Period to ensure that the Company realises the best available transaction for the First Disposal Portfolio, as well as these proposals being subject to shareholder approval alongside the forthcoming Continuation Resolution.

“We believe the proposals set out today provide the best way to balance immediate shareholder value with the exciting longer-term prospects for the Company. Therefore, the Board intends to unanimously recommend shareholders support these proposals and vote in favour of the resolutions at the Extraordinary General Meeting and the 2023 AGM.”

Expected Timetable

Song : New proposals from Hipgnosis Songs a positive development