15th September 2023
Interwoven in the text this week are several song titles taken from Hipgnosis’ Billion Streamers playlist and are all owned by the London listed Hipgnosis Songs Fund. Comment on our LinkedIn posts and see if you can get all the artists (no cheating!)!
What a week it’s been for the two UK listed music royalty trusts Round Hill Music and Hipgnosis Songs, two Youngblood’s of the 150+-year-old investment trust sector with both launching in the past 5 years.
Last Friday, Round Hill Music announced that it received a bid for the whole company at a 67% premium to the undisturbed share price, and a 12% discount to its net asset value. The shares roared higher on the day finishing at around $1.13 per share compared to a starting price of $0.69. The bid price represents an all-time high share price for Round Hill Music and is likely to receive shareholder support. The bid came from Concord, a US based music company backed by private equity firm Apollo that has deployed over $2bn of capital and completed more than 100 transactions across recorded music, music publishing and theatricals. They clearly have High Hopes for the future of the industry.
Frankly, we were surprised by the bid – as was the rest of the market. Frustratingly, we were not (and are not) owners of Round Hill Music, but in recent months have re-established a position in the asset class via Hipgnosis Songs. If you have been following our Crescendo blogs for a while, you will be very familiar with our views on the investment trust sector and the reasons we believe discounts are wide (if you haven’t seen any of our Investment Trust series yet, you can read the first part here). Investment trust exposure in our funds today is focused on either self-help situations or trusts that have clearly defined catalysts in the short to medium term to unlock the value that very wide discounts present. We are also only willing to back trusts where we want to own the net asset value and believe there is scope for NAV accretion over time (some discounts can be closed by the NAV falling to the share price!).
We previously owned both Round Hill and SONG for their equally attractive portfolios of songs but sold both in 2022 due to the competition for yield from more traditional sources as interest rates rose dramatically during that year. This increase in risk free rates also raised question marks regarding the veracity of song catalogue valuations, placing further downward pressure on the share price. Key to the original attraction to the song royalty asset class was the growth prospects for the overall music market driven by streaming growth in the long term, and potential for an increase in the piece of the pie that artists and writers enjoy. Round Hill has an attractive portfolio, with a good vintage out of the revenue decay phase (newer songs have a sharp revenue decay phase in the first 3-5 years after an initial surge of use rolls off, older songs don’t suffer this), while SONG owns more iconic and well known assets with 25% of the songs in Spotify’s billions club (songs with over 1 billion streams on the platform) and 11% of Rolling Stone’s ‘The 500 Greatest Songs of All Time’. The thesis was backed up by both sets of recent results clearly demonstrating the revenue growth credentials. Both trusts were trading at a very wide discount to its NAV of 40-50% in recent months but we ultimately decided to reintroduce SONG in May this year because it had an obvious catalyst to close the discount to NAV, a looming continuation vote due by the end of this year.
Given SONG’s investment advisor also runs a pool of capital for the large private equity group Blackstone which is in acquisition mode, there is an obvious buyer waiting in the wings in the event a vote failed. The Board therefore had to act and do something ahead of the vote to prove that they had shareholders’ interests front and centre of their minds. It has taken longer than we hoped for an announcement, but just days after the bid for Round Hill the Board of SONG announced a major portfolio disposal of roughly 20% of its assets, with proceeds used to both significantly pay down debt and initiate a monster share buyback programme of up to $180m worth of shares which should be highly accretive around the prevailing level of discount (broker estimates put it at up to a 6% boost to NAV).
Unsurprisingly, the buyer of most of the assets is Blackstone, in the other private vehicle run by SONG manager Merck Mercuriadis. Pouring some Cold Water on the transaction, it is being done at a headline 17.5% discount to the NAV (but at a significant premium to the share price). Digging a bit deeper raises some significant issues that we are investigating further. For example, as part of the transaction the acquirer will get the Right to Income from the 1st January 2023 (ie all the income that the catalogues have produced so far this year), which to date has been a touch over $15m. Other factors not included in the headline discount to NAV include corporation tax, transactions fees, and SONG retaining liability for artist bonus provisions should the catalogues they are selling perform well. Accounting for these, the actual discount to NAV is much wider (roughly 25-30% depending on the bonus liability).
The Board and manager are very keen to highlight that they are not selling the best assets. Indeed, post the transaction the average vintage of the portfolio lengthens, with the remaining portfolio of better overall quality with higher expected growth rates than the disposed of assets. There is also a ‘Go-Shop’ provision that means a 3rd party can bid for the assets over the next month or so, so there is a chance that the assets go for a higher price. Shareholders will also have the opportunity to block the deal if they determine it is not in their best interests and pursue other alternatives for realising value from the assets.
Crucially, whilst both deals are to be executed below net asset value, the transactions do provide evidence that the clearing price for song catalogues is above the valuation implied by current share prices, so its perhaps no surprise that SONG shares jumped higher on the day of the Round Hill bid. In the End, we are happy that Something Just Like This is happening across the investment trust sector. Capital recycling is more important than ever across the investment trust universe with discounts languishing where they are, but as ever the devil is in the detail. Whilst they do not represent perfect outcomes and we are conducting significant further scrutiny on the Hipgnosis transaction and its implications, both trusts could not be left to languish on 50% discounts.
Boards are no longer hiding in a Castle on the Hill, riding the easy wave of premiums and new issues that characterised the trust sector for over a decade through to the end of 2021. A far more proactive stance is required, and is being taken across the sector, from private equity (Pantheon’s £200m buyback programme) to renewables (Ecofin US Renewables Infrastructure’s strategic review), to equity (Nippon Active Value fund merging with abrdn Japan Investment Trust and Atlantis Japan Growth Fund), to property (Civitas bid amongst others earlier this year) and now music royalties. It is a Sign of the Times that the sector must change, and change it is.
Dan Cartridge – Assistant Fund Manager
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