Discord at Hipgnosis as results highlight worries over asset value

Troubled music rights owner Hipgnosis Songs Fund urged investor caution on the valuation of its assets on Thursday as it continued to squabble with its investment manager on how much its catalogue of songs is actually worth.

HSF published its delayed interim results, which show it had cut it's valuation by almost 10% and said investors should view the fund's net asset value "with a higher degree of caution and less certainty than might otherwise be attached to it as an accurate reflection".

Operating losses before tax for the six months to September 30 were $63.6m, compared with a loss of $17m a year earlier. Gross revenue from continuing operations for the period fell too $63.2m from $86.4m.

Operative net asset value (NAV) per share fell 9.2% from $1.92 at the end of March to $1.74 as of September 30. The company's dividend was axed to comply with bank loan covenants.

HSF, which owns the rights to songs from artists such as the B-52s and Red Hot Chili Peppers, is undergoing a strategic review to deal with “ongoing failures in the financial reporting and control process”.

Concerns over the valuation of assets forced it to delay publication of half-year results this week after a dispute with Blackstone-controlled Hipgnosis Song Management (HSM), which advises on investments, and is headed by HSF founder Merck Mercuriades, a former manager of artists such as Elton John.

Tensions started bubbling in October when shareholders rejected a deal to offload a fifth of the portfolio to a Blackstone fund also managed by Mercuriades - amid complaints of a conflict of interest - for a $417m, a hefty 24% discount to valuation. A quarterly dividend was also cancelled after the accrued cash from US royalty payments came in $12m lower than expected.

HSF subsequently sought advice from HSM for an opinion on the fair value of the company's assets after appointed valuer Citrin Cooperman came up with a figure that was “materially higher” than the one implied by actual recent transactions, including Hignosis’s own $23m sale of 20,000 “non-core” songs at a 14% discount.

OUT OF HARMONY

HSM initially refused and then produced a “heavily caveated” opinion, but refused consent for correspondence on the matter to be published on the company's website “in order to provide transparency for shareholders”, said new chairman Robert Naylor”.

“I therefore urge the investment adviser to provide the board with their opinion as to the fair value of the company assets, without caveats, such that we can provide greater certainty and transparency to our shareholders,” Naylor said.

In response, HSM issued a terse statement saying it had fulfilled its duties on valuation and the accounts "in a timely and efficient manner".

Hipgnosis was founded in 2018 by Mercuriadis, who saw online streaming of music as a viable investment opportunity to garner royalty income from popular hits.

However, rising interest rates have seen investors turn to other asset classes and forced the company to change how it calculates the value of future revenues. Hipgnosis in October cancelled dividend payments to shareholders, saying that changes to US royalties had reduced its income and a payout would force it to breach its covenant with lenders.

Reporting by Frank Prenesti for Sharecast.com