Shares in music royalties firm Hipgnosis Songs Fund (SONG) slid 15% to a new all-time low of 54p after an independent assessment of its portfolio chopped 26% off the valuation.

In response, the firm said it would divert its free cash flow to paying down its debt and there would be no dividends ‘for the foreseeable future’.

(Chart could not be loaded)

IN A FUNK

In what it described as ‘an update on due diligence, valuation and NAV’ (net asset value), the board of Hipgnosis revealed a review of the firm’s portfolio, conducted on a bottom-up basis by Shot Tower Capital, analysing the royalty statement data of each of the catalogues, had come up with a valuation range of between $1.74 billion and $2 billion after deducting contingent catalogue bonuses.

That compares with the firm’s own fair value assessment at the end of September 2023 of $2.55 billion after provisions, meaning that at the mid-point Shot Tower’s valuation is 26% lower than previously thought.

In its six-month results published last September, Hipgnosis admitted there were ‘multiple data points and transactions within the market which were at material discounts to the implied fair value of the assets at that time’.

It sought advice from its investment adviser Hipgnosis Song Management Ltd, which is majority owned by funds managed and/or advised by US private equity group Blackstone (BX:NYSE), who initially refused but eventually offered a ‘heavily caveated’ opinion.

MONEY’S TOO TIGHT TO MENTION

Due to the significant decrease in operative NAV from $1.74 per share to $1.17 per share, the board has decided it would be more appropriate to reduce gearing so free cash flow will be diverted towards paying down debt and there is no prospect of dividends restarting in the short term.

On a positive note, Shot Tower estimated the company's cash net revenue after reduction for third party royalties and administration expenses was $121.7 million for the 12-month royalty statement period ended 30 June 2023, which is at least consistent with the $119.4 million cash net revenue figure for the 12-month period ended 30 September 2023 derived by BDO as part of its quality of earnings analysis.

Hipgnosis Songs Fund has a collection of proven hit songs by some of the most talented songwriters in the world, but is in the middle of legal disputes with its investment adviser and its founder Merck Mercuriadis.

---