Another bum note from Hipgnosis Songs Fund. The investment trust managed to put the decimal point in the wrong place in its much-anticipated announcement of what a new valuer thinks its catalogue of songs from acts such as Blondie, Red Hot Chili Peppers and Shakira might really be worth. It meant 92p a share, but said 0.92 pence a share. A correction followed.
The correction that long-term shareholders must dearly wish for is that Hipgnosis had never come to the stock market in the first place in 2018. Against a starting price of 100p, the revised net asset value looks poor, as opposed to shocking, but is only half the story.
First, the new asset figure is a cut of 26% from the last estimate six months ago from the previous valuer. Different methodologies produce different outcomes, but $2.6bn-ish to $1.9bn-ish is a big drop. Second, Hipgnosis added that the valuation doesn’t include tax charges that could apply if the assets were sold at the new level. Third, the board said the lower figure means no dividends “for the foreseeable future”, a humiliating position for a fund established to turn royalty payments from a broad portfolio of songs into a reliable income stream for investors.
Add all those factors to the mix – plus a fall-out with the fund’s investment adviser, a firm led by the Hipgnosis pioneer Merck Mercuriadis and majority-owned by Blackstone – and one can understand why the market price of the shares fell to 58p, down 8% on the day.
The question now is how the board, much-changed from the crew that oversaw the acquisition of the songs, intends to improve matters. Come back at the end of the month to discover chairman Robert Naylor’s answer, but the holding position of stopping dividends to pay down debt looks a non-starter as a permanent strategy. Last autumn’s vote against continuing the trust in its current form was, in effect, a vote for more radical measures.
That leaves a sale of the catalogue of songs in part or whole. One little irony here, though, is that shareholders last year also voted against the sale of 65,000 songs for $440m, partly because the discount to book value was so steep. Compared with the new lower valuation, the discount no longer looks out of whack – albeit that transaction only covered a fifth of the portfolio.
Do interested parties for a bigger transaction exist? Well, Blackstone, the would-be buyer in the rejected $440m deal, might want another run, but the perceived conflict of interest with its role as owner of Hipgnosis investment adviser, was the other stumbling block last time. Appetite among other private equity and investment houses is hard to gauge in an illiquid market (one reason, on top of the related valuation complications, why this type of “alternative” asset class looks ill-suited to the public markets).
But some form of break-up, with the aim of getting the balance sheet into a position to resume dividends, looks the most promising route to try to limit the damage. As the sunken share price suggests, an income fund that doesn’t pay dividends makes no sense.
