Hipgnosis Songs Fund (SONG) provided an update on its valuations. During the release of its interim results, the board stated that there were multiple data points and transactions within the market which were at material discounts to the implied fair value of SONG’s assets at that time. The board therefore sought advice on this matter from Hipgnosis Song Management Limited (the “Investment Adviser”), which is majority owned by funds managed and/or advised by Blackstone. The Investment Adviser at first declined to give an opinion but, after repeated requests from the board, eventually provided an opinion which was heavily caveated. As a result, the board recommended that investors use the reported NAV with a higher degree of caution and less certainty than might otherwise be expected.
As a result, the board appointed Shot Tower Capital as lead adviser to provide an independent valuation of SONG’s assets. Shot Tower has now provided a preliminary valuation report as at 1 March 2024, which estimates the fair market value of SONG’s portfolio at between $1.80bn and $2.06bn, and $1.74bn and $2.00bn after deducting contingent catalogue bonuses of $59.9m. The Shot Tower valuation compares to fair value as at 30 September 2023 of $2.62bn, and $2.55bn after deducting the catalogue bonus provision of $68.1m.
Shot Tower also indicated that SONG’s cash net revenue after reduction for third party royalties and administration expenses was $121.7m for the 12-month royalty statement period ended 30 June 2023, which is consistent with the $119.4m cash net revenue figure for the 12-month period ended 30 September 2023, derived by BDO as part of its quality of earnings analysis.
The Shot Tower valuation midpoint of $1.93bn therefore reflects a multiple of 15.9x net royalty income prior to deducting contingent catalogue bonuses and a reduction in valuation of 26.3% to the valuation as at 30 September 2023.
Adjusted solely for the Shot Tower valuation, SONG’s operative NAV would be approximately $1.17 per share, equal to c. £0.92, as compared to the last reported operative NAV of $1.7392 per ordinary share as at 30 September 2023.
Due to the decrease in NAV, the board has considered it appropriate to reduce gearing and therefore intends to use SONG’s free cashflow to pay down debt and, therefore, does not intend to recommence paying dividends for the foreseeable future.
[QD comment: “This represents a big hit to the NAV, but given that the share price has long been indicating that shareholders did not believe the Citrin Cooperman valuation, it is probably helpful that now we have a less rose-tinted NAV to work with. It does align with the notion that the adviser effectively ‘bought in at the top’. The Shot Tower Capital valuation translates into a much higher gearing figure for the fund. Today’s announcement does not make it clear whether the lenders are demanding action to reduce the debt burden, but the directors’ decision to prioritise debt repayments over dividends is probably a sensible one. Now, we wait to see if a bidder emerges on the back of this.”]