What happens when a man buys 25% of the songs that have exceeded 1 billion streams on Spotify? For Merck Mercuriades, founder of Hipgnosis Song Management (HSM), a British fund that owns the rights to 65,000 of the greatest musical hits, the deal offers both big profits and a value above $1.9 billion, although it comes with a bill. considerable. The idea is simple, through Hipgnosis, Mercuriades plays with the idea of a 'Music Exchange', a market where investors accumulate a kind of dividends through royalties generated by a song. When vinyl became obsolete and CD sales decreased, the music industry adapted, and today, the big winner is revenue from streaming: copyrights generated $40 billion in revenue in 2022.
Although music catalogs have existed since the nineties with the rise of 'Bono Bowie', Hipgnosis has once again adapted this idea to the era of streaming. However, buying from the best is expensive: the high cost of acquiring such notable names and the complicated game of pricing intellectual property has plunged the company into a sea of debt of 650 million dollars (605 million euros). , despite having ballads like Back to Black by Amy Winehouse or a handful of Nirvana hits. The company is structured into several compartments, of which one is listed on the Stock Exchange (and is therefore open to investors of all types) while others are private and owned by large institutional investors. Now, however, the entire structure faces a crisis of confidence. “This means that the funds were not structured correctly from the beginning,” they commented to Five days financial source.
Hipgnosis' extensive portfolio of songs, far from its golden days in 2020, has plummeted by a quarter in the last month. The reason? Shot Tower Capital, a company in charge of auditing the company, lowered the valuation of the assets of the music portfolio to 1.9 billion, a reduction of 26.3% compared to its value in 2023. In addition, the fund has reduced its income by 21% this year and has plummeted 50% on the stock market in two years. The company has already stopped dividend payments at the end of 2023 to pay off $630 million in debt. As if this were not enough, a recent accounting error has reduced the value of the portfolio by another 7.6%. Now Mercuriades and its partners have to explain it to investment funds like BlackRock, which have invested around 1 billion and have a 50% stake in the company since 2018. The firm also has majority shareholders such as Investec Wealth (7.5% ) Asset Value Investors (6.2%) and BlackRock (3.2%) who are now beginning to doubt this business.
But it was not always like this. A little less than five years ago, the project of this former executive who worked with industry heavyweights such as Beyoncé or Guns N' Roses, was in fashion among investment funds seeking to obtain profits in an economy of low interest rates. It was an attractive business for both the artist and the investment fund, which he could invest in a low-risk asset class that paid dividends just as a pandemic loomed, according to some analysts. As artists faced tour cancellations and delays amid a health crisis, giving up music rights for top dollar seemed like a smart business decision.
Today, however, shadows are beginning to appear in this business model based on amassing copyrights: The royalties derived from the songs are neither stable nor easy to predict, and therefore setting the price of the copyrights. songs is a complicated game. The fund now finds itself at loggerheads with its own shareholders, and is unable to agree a review of the value of the music catalog in the face of future asset sales. In October of last year, 83% of shareholders voted against the sale of rights for 440 million dollars (409 million euros) to a fund owned by Blackstone, a measure proposed by the company to maintain shareholder remuneration and reduce debt. After this setback, Shot Tower Capital bankers came into play, hired by Hipgnosis to draw up a viability plan to address the high debt and musical dividends that are not in line with what was expected. These experts recalculated the value of the portfolio, which was cut last March by more than a quarter.
Shot Tower Capital has once again reiterated its assessment of catalogues, although it has discovered new avenues of water. The entity has indicated that Hipgnosis is below the standards of the music sector and that it has not complied with due diligence practices. Among them, failures stand out such as the publication of brochures that imply greater ownership than reflected in the rights, excessive and unjustified expenses, as well as a possible conflict of interest with Blackstone. Furthermore, they estimate that 75% of the catalogs have not met their projections.
These doubts, however, do not seem to extend to strategists, where Hipgnosis continues to have the unanimous support of analysts, with target prices higher than the current price. The analysis firm, Liberum, places its target price at 131 pounds per share, although it is currently trading above 60. Investec increased its recommendation to “buy” a few weeks ago despite the recent falls on the stock market, although it should be added that the firm is one of the main shareholders of the company. JP Morgan continues to recommend “overweight” and RBC Capital, also a shareholder, rates these shares as “overweight”, and leaves its target price at 120 pounds.
Although it appears that acquiring rights to hit songs has not been a profitable asset category (at least at the prices paid by Hipgnosis), new players are shaking up the business model. JKBX, or 'jukebox', a startup backed by Spotify, attempts to adopt the same idea, but from a different perspective: the company (which operates with permission from the US SEC) offers securities that represent the right to receive a percentage of the copyright of one or more songs. Investors and/or fans can buy or sell these titles through the platform, which vary in price. Among the most expensive songs on JKBX, is the song Counting Stars of the American group One Republic, which is trading above $31 per share. According to the website, the yield of this song is 4.17%, taking into account the copyrights generated in 2022 and the current price of the title.
Another example is Labelcoin, which also emerged during the pandemic, and implements the same idea as JXBX, but making this type of investment available to small investors through a mobile application, as well as Songvest, which emerged in 2021. The goal of Labelcoin is, according to the company, to end “artist poverty” and raise capital instead of selling copyrights to venture capital. Both firms carry, however, high debt, as does Round Hill Music, based in London like most of its competitors and which emulates a business model very similar to that of Hipgnosis. Round Hill has also resorted to selling part of its catalogs to meet its debt, which stood at over 108 million pounds in 2023 (126 million euros), and is in negotiations to be acquired by capital risk, despite the fact that it managed to increase its income by 32% in 2022.
Hipgnosis faces a key vote on the future of its music catalogs on April 26. If he does not achieve shareholder support, he will have to consider a reconstruction or sale of the company for around 245 million pounds (286 million euros). Until then, it appears that these funds will continue to touch the blues.
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