Hipgnosis Songs Fund (HSF) annual report published in mid-June has revealed a disappointing reality: the fund was worth less than the value of its actual song assets.

Not only that, but its net revenues fell by 12.5% from the previous year, and its net losses grew from $19.4 million to $89.6 million over the same period. 

Founder Merck Mercuriadis justified the poor performance by pointing to the fact that the world has been through a ‘global pandemic, the largest war in Europe in nearly 80 years and increasing inflation and interest rates’. 

He promised future action to increase HSF’s valuation, which immediately got people thinking of potential catalogue sales. In fact, The Financial Times had published an article the day before the fund’s annual report was released, in which it revealed that many investors had been advocating for the same solution. The alternative strategy of increasing the share price through further acquisitions is  nearly impossible due to challenges in raising money. 

The fund took action this September by announcing the plan to sell 29 catalogues to its sister and Blackstone-backed fund Hipgnosis Songs Capital (HSC), for an initial cash consideration of $440 million. Of these, $250 million would be channelled to debt payments, and $180 million to purchase their own shares. 

The announcement revealed that HSF expects to retain ‘81% of its existing portfolio by Fair Value with an increased focus on older vintages’ and the catalogues it plans to keep are ‘expected to deliver strong income growth over the medium term’.

However, this is not the only deal HSF plans to make. A second catalogue sale composed of song rights from the fund’s acquisition of Kobalt Capital in 2020 for $25 million to a private buyer is expected to also be finalised. 

These deals will be voted on by shareholders at the annual general meeting (AGM) taking place at the end of October. The decisive ‘Continuation Vote’, which determines whether the fund’s public trading continues or management changes, will also occur at that meeting. 

But what initially seemed like good news for investors is now insufficient to persuade them to sell the catalogues. The fund’s top shareholders argue $440 million is not enough. ’If it was 30% higher then it might make sense. We don’t really want to be parted from the assets’ one of them told The Financial Times.  

Nothing has been settled yet, not only because the AGM has not taken place, but also because of a ‘Go Shop’ provision included in the announcement of the $440 million catalogue sale to Hipgnosis Song Capital. This clause ensures HSF has 40 days from the initial agreement communication (September 14th) to solicit other transaction proposals from alternative interested parties. 

If anyone comes up with a higher acquisition offer, then it is likely HSF will sell the 29 catalogues to them – unless Hipgnosis Songs Capital matches the bid, in which case HSF has to sell the catalogues to its sister investment fund, given their ‘matching right’. This right determines that if HSC matches a third-party bid, HSF is obliged to sell them the assets instead. 

In a scenario where a third-party bid is not matched by a Hipgnosis Songs Capital bid, Hipgnosis Songs Fund can delay the AGM, but it must complete the full transaction no later than 13 days after the meeting.

Adding to investors’ frustrations, the fund’s independent valuer, Citrin Cooperman, disclosed that the retroactive payments from US song catalogues, originally anticipated to be $21.7 million in March, have been adjusted to $9.9 million, as revealed this Monday (September 16th). 

This cut is due to a recalculation that the US Copyright Royalty Board did of its royalty payments, leading to an all-time low HSF share price – a drop of more than 10% of its value before the news became known. 

As a result, the fund had to cancel the proposed interim dividend, a pre-AGM payment to shareholders, as it would otherwise breach the covenants on its $700 million revolving credit facility, which enabled the company to withdraw money and fund its operations. 

‘Sadly, its 15 minutes of fame has gone up in smoke amid accusations of poor corporate governance, a disastrous attempt to sell some assets at a big discount to a private fund which its adviser also manages, and now a dividend crisis’ Russ Mould, investment director at AJ Bell, told the Guardian. Mercuriadis is also the founder and CEO of Hipgnosis Song Management, an investment advisor to both Hipgnosis Songs Fund and Hipgnosis Songs Capital.

These new developments have created new pressure on investors’ voting decisions at the AGM. The Financial Times’ latest report on the matter advises the fund’s investors to use their vote as a form of protest and suggests the board should ‘draw up proposals for how to rebuild, as well as potentially wind-down the company’ even before the voting takes place.