Earlier this month, UK-listed Hipgnosis Songs Fund (HSF) published its latest fiscal results, and they were speckled with up-pointing green arrows.
Case in point: HSF’s gross revenues were up 7.5% YoY in the six months to end of September 2022, while net revenue was up 5.8% YoY.
Following the publication of those results on December 8, the company held a Capital Markets Day at the Maxwell Library in Savoy Place, London.
Presentations on the day came from various senior members of Hipgnosis Song Management – that’s HSF’s investment advisor – including Ben Katovsky (President/Chief Operating Officer), Ted Cockle (Chief Music Officer) and, of course, Merck Mercuridadis, CEO & founder of the Hipgnosis group of companies.
Bon Jovi’s Richie Sambora even appeared to perform an intimate acoustic rendition of Livin’ On A Prayer.
For MBW’s eyes and ears, perhaps the most interesting part of the morning’s events came when Mercuriadis and his team were grilled by various investment analysts about HSF’s half-year results, and its future.
Here are four comments from Mercuriadis that stood out…
1) “I’m always going to be the manager of these catalogs…”
The first question faced by Mercuriadis touched on HSF’s standing compared to its sister $1 billion private fund – Hipgnosis Songs Capital – whose investments are also managed by Hipgnosis Song Management (HSM).
The same question also touched on the current share price of HSF, which continues to trade at a significant discount versus the company’s published ‘Operative NAV (Net Asset Value)’, which most recently came in at $2.2 billion (based on a fair value of $2.67 billion).
Said Mercuriadis: “I think as most investors will know, I have a ‘put’ in my agreement, the IA [investment advisor’s] agreement with [Hipgnosis Songs Fund] that if the fund were ever to be sold or someone were to ever take it over, I would have the first opportunity to [acquire it].”
“It’s very important to me when I look at these songwriters in the eye and effectively acquire their metaphorical children, that I have integrity and credibility [to oversee] the success of the company.
“I’ve made sure, perhaps at commercial sacrifice to myself and to the IA [investment advisor], that both on the [HSF] side of things and even with my private fund with Blackstone, that I’m always going to be the manager of these catalogs.”
“I’ve made sure, perhaps at commercial sacrifice to myself and to the IA, that both on the [HSF] side of things and even with my private fund with Blackstone, that I’m always going to be the manager of these catalogs.”
Mercuriadis has this month already touched on his disappointment in HSF’s current share price, which has dropped by around 32% YTD..
He noted when announcing HSF’s results on December 8: “I share the disappointment of Shareholders that the true value of our iconic Songs is not reflected in today’s share price. As Songs are a new asset class, we understand that the market has concerns about both valuation and discount rate, particularly when our NAV is stable in a macroeconomic environment in which the value of many other assets are declining.”
Mercuriadis also noted his optimism in the future value growth of Hipgnosis Songs Fund, however, commenting that the firm’s current share price in his eyes represented an “incredible investment opportunity”.
At the Capital Markets Day in London, Mercuriadis continued on this theme, stating: “[T]here’s incredible value here, and that incredible value is something I’m determined is going to be reflected in the share price.
“I will work tirelessly along with our people – [Hipgnosis Song Management] is now more than 50 people strong in the UK, with additional people in America – to [insure] that the share price reflects the real asset value of this company as fast as we possibly can, by always telling the truth, working hard, and adding value.”
2) People are still writing “very significant checks” in music’s M&A world…
There’s no doubt about it: with macroeconomic pressures swirling, acquisitive activity in music rights in 2022 has been far slower than in 2021, when over $5 billion was spent on copyrights.
However, that doesn’t mean things have ground to a halt.
“We are seeing multiples being paid that are significantly above where [Hipgnosis Songs Fund’s] NAV is.”
At HSF’s Capital Markets Day, Mercuriadis pointed to a Genesis and Phil Collins catalog recently being sold to Concord for a nine-figure sum, as well as Primary Wave striking a $2 billion deal with Brookfield – $700 million of which was immediately deployed to buy existing Primary Wave-managed assets.
Continued Mercuriadis: “But a lot of the people that have come along in the last couple of years that have competed against us are out there [today] writing very significant cheques.
“I can’t comment on the individual catalogs. But what I can tell you is that we are seeing multiples being paid [in 2022] that are significantly above where [Hipgnosis Songs Fund’s] NAV is. I’m not talking about where our share price is, but where our NAV is.”
3) Younger songs are making up a smaller percentage of HSF’s portfolio – but have a unique advantage
Hipgnosis Song Management’s team were asked at the Captial Markets Day about the average age of songs in HSF’s portfolio that are less than 10 years old. Such songs, as opposed to those over a decade old, are typically expected to see a decline in annual earnings – a ‘decay curve’ – until they hit an annual revenue plateau.
Chris Helm, the CFO, of Hipgnosis Song Management, revealed that, of the songs owned/part-owned by HSF that are less than 10 years old, the average release date was 2016 (i.e. six years ago).
Merck Mercuriadis noted that younger songs “continue to make up a smaller part of [HSF’s] portfolio”. However, he then acknowledged that these under-10-year songs come with unique advantages: Namely, you can generally buy them cheaper than the ‘classics’… and they might just end up making money for longer.
“It’s no secret to anyone that the Pink Floyd [recorded music] catalog was for sale not too long ago, and in the end that catalog won’t trade.”
“[We] only buy songs that are extraordinarily successful and have what we believe is cultural importance,” said Mercuriadis, pointing to Senorita, performed by Camila Cabello and Shaun Mendes. Released in 2019, that song has over a billion streams on Spotify; Hipgnosis owns a slice in its via its acquisition of Andrew Watt’s catalog in 2021.
Said Mercuriadis of buying sub-10-year songs: “These are songs we buy on low multiples relative to the rest of the portfolio, sometimes single digit [multiples]. We know they’re going to decay. But at the same time we know we’re also going to get greater than the baseline [figure used for an acquisition multiple] for a couple of years beyond what we’ve bought them at. Then they’ll trough and level off.”
Added Mercuriadis: “It’s no secret to anyone that the Pink Floyd [recorded music] catalog was for sale not too long ago, and in the end that catalog won’t trade. [With] a catalog as iconic as that, on the surface it looks amazing, but below the surface, you’ve got incredible records that are going to go into public domain – because it’s a catalog that is over 50 years, hitting 60 years, old.”
Mercuriadis then said to a JP Morgan analyst in the room: “You’ve also got an audience [for Pink Floyd] that includes me and you; Wish You Were Here is my favourite record of all time. But [in investment terms] it’s an audience with a limited life left to it. While if you’re the 14-year-old girl that was listening to Senorita three summers ago, you’ve hopefully got another 70 years of life left in front of you, and another 70 years of consuming these incredible songs that become a fabric of your life and part of the fabric of society.”
4) “The sync department of Sony, Universal, or Warner… will tell you we are the very best”
One of the highlights within Hipgnosis Songs Fund’s recent half-year numbers (to end of September ’22) was its result in sync revenues, which were up 32.0% YoY to $9.78 million.
While answering a question about when HSF catalogs will end their administration agreements with the three major music publishers, Mercuriadis gave a nod to what he believes is his company’s unique standing in sync – and the working relationship it enjoys with the majors for syncs on copyrights HSF owns or part-owns, but the ‘Big Three’ administer.
“We have significant catalogs [administered by] Universal, Sony, Warner, Kobalt etc,” he said. “All of them have their strengths, all of them have their weaknesses, and we know those probably better than anyone. Our chief concern is to add value for our shareholders; at the same time we’re often adding value for Universal, Sony, and Warner as well.”
“The sync people [at major music companies] love us, because we’ve created a level of efficiency amongst these iconic catalogs they’ve never [seen] before.”
He added: “On the advocacy front, I’m very critical of those companies because [Mercuriadis believes] they hold back how songwriters are being paid. But ultimately if you get past the senior leadership of those companies and you get to the sync people… they love us, because we’ve created a level of efficiency amongst these iconic catalogs they’ve never [seen] before.
“At the same time that we’re working aggressively to actively manage our songs and add value, [the major music companies are] sending us [sync] requests all the time. In most hands those passive requests rarely get answered and acted on in a timely fashion because there’s so much bureaucracy [in music rights]. But when they send us something they have answers in seconds.
“You could go to the sync department of Sony, Universal, or Warners and I guarantee you that they will tell you we are the very best [partner] there is because they’ve been able to make more money at the same time we’re making more money.”Music Business Worldwide
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