Someone once made a joke that went something like “how do you make a million dollars in the music business? Start with two million and go from there”. Shareholders in the music industry’s current favourite hot mess, Hipgnosis Songs Fund (SONG) might have felt yesterday that this joke runs a little too close to the bone, as the stock market listed investment fund’s share price hit an all-time low of 52.9p.
So what happened? The day got off to a flying start with an announcement put out at 7am by SONG that included a critical error in a key figure. The assets underlying the fund - the net asset value, or NAV - were, said the announcement, worth just 0.92 pence per share. Given Friday’s closing share price was around 63 pence this was not so much a haircut as a full-on beheading. To wake up on a Monday morning and discover that the company you owned shares in had assets worth a fraction of the share price is not the best start to the week.
Decimals, as we all know, are difficult. Distinguishing between pounds and pence is also quite tough - particularly if you work in the City where these things are theoretical concepts rather than cold hard cash. An hour or so later - and after the markets had opened and trading commenced - SONG put out a hasty revision giving the correct figure. The assets were actually worth 92.08 pence per share. Phew!
For anyone looking at things in isolation, being able to buy 92p worth of something for 63p sounds like a steal. Particularly if you’d previously been prepared to pay 110p - but more on that later.
Unfortunately, things aren’t quite that simple. Investment funds are pretty complex, and to correctly value an asset you need to take quite a lot of things into account. And applying an accurate value to a song is significantly trickier than valuing - say - a lump of gold.
It’s this trickiness in valuing songs that, ultimately, lies at the heart of the recent high drama goings-on in the house of Hipgnosis. The recent bust up between SONG the fund and Hipgnosis Song Management, the Merck Mercuridias-run company that acts as SONG’s investment advisor can, in many ways, be reduced down to “no one really knows what a song is worth”.
Back in September things looked a little different at SONG. While the share price was down significantly from where many people thought it should have been - and significantly down from its peak of around 130p a share - it had been consistently hovering around the 80p mark for a few months. Investors wanted better returns though, and so SONG - advised by HSM, which is majority owned by Blackstone - announced a proposal to sell various catalogues of songs to Hipgnosis Songs Capital, the Blackstone-backed and confusingly-similarly named private song rights investment fund.
The proceeds of that sale would have allowed SONG to buy back shares, bolstering the share price as well as paying down hundreds of millions of pounds in debt. 85% of shareholders said no. A key concern was that people felt that Hipgnosis Songs Capital was getting favourable terms, with the implication being that because Blackstone was also the majority owner of HSM, HSM was not acting entirely independently in the matter. Accusations were made that key song rights had been “cherry picked” and the implication was that the price these rights were going to be sold at to HSC were less than their true value.
This kicked off a series of events that saw SONG’s then board - who were commonly perceived to be mates of Mercuriadis - announce a “strategic review” looking at how the fund had been managed and effectively whether or not HSM had been doing its job properly. Investors weren’t convinced and ousted the board and voted down the proposal to sell songs to HSC.
The new board continued the strategic review and Monday’s announcement was effectively a milestone point in that review, going some way to establish the true facts around the value of the songs the fund owns - or, at the very least, establish some alternative facts.
Those alternative facts weren’t great. The previous value for SONG’s songs had been $2.62 billion said Monday’s release. The new valuation as assessed by Shot Tower Capital was somewhere between $1.8 billion and $2.06 billion, with a “valuation midpoint” of $1.93 billion. That was a reduction of 26.3%. This new valuation meant that the “Pro-Forma Operative Net Asset Value per share” converted to £GBP was the 92.08p figure. Back in September that Operative NAV per share was 142.49p. Meanwhile, the proposed deal with HSC - say sources familiar with the intricacies of corporate finance - would have represented a NAV of 110p “read across the portfolio”. Suddenly, not such a shoddy deal.
By any metric, that’s a fairly big drop - and a drop that big has significant implications. The two most immediate were that a SONG has a covenant which says that it can’t have debt that exceeds 30% of its NAV - and with a startling reduction in NAV that debt covenant could be inadvertently breached. As a result, the fund was going to use the cash it generates to pay down its existing debt. As a consequence of this, said SONG’s announcement, it would not be paying any dividends “for the foreseeable future”.
That all sounds very prudent, unless you are an income investor - funds that buy shares in other funds or companies that have strong income streams, and which pay those income streams out in the form of dividends. If you’re a fund that owns shares that pay dividends and the board of a company that has previously paid dividends says it’s probably not going to pay any dividends again for a long time then you’re probably going to want to get rid of those shares, because they’re no longer suitable for your investment strategy. And, in fact, for some fund managers, their own compliance rules mean that if a company actively states it’s not going to pay dividends then, whether or not you think that company is a good bet in the long run, you might be compelled, by your own rules, to ditch your shares.
To give some insight into quite how badly things went, the average volume of shares traded each day is - according to Google Finance - around 4 million. Yesterday saw a staggering 25 million shares in SONG change hands - with similar volumes today.
Ouch.
But it doesn’t end there. One other key bone of contention between SONG and HSM is the “call option” that HSM holds, which effectively says that if the investment adviser agreement between SONG and HSM is terminated, then HSM can buy the entire portfolio of songs. There are a number of scenarios in which the contract between SONG and HSM might be terminated - and one of those is if SONG decided to wind up operations and sell the entire catalogue to another owner.
Back when the share price was around 80p and the NAV was around 142p this call option was - say city sources who talked to CMU - more theoretical than a real option. The HSM call option says that HSM can buy the entire catalogue from SONG at the higher of three different numbers: either the “fair value” of the portfolio - as determined by the independent valuer, which is now Shot Tower - or the total market cap of the company (which is now substantially lower than the “fair value”) or by matching the price that anyone else is willing to pay.
If Blackstone-backed HSC had been willing to buy songs at an equivalent 110p NAV per share, then suddenly a 92.08p NAV per share seems like a great deal. Even if SONG can find someone who is prepared to pay a 20% premium to buy the entire catalogue at 110p NAV then it seems likely that HSM - with Blackstone’s money - would almost certainly match that price.
Monday’s announcement concluded by saying that Shot Tower will provide its full findings to the board by Monday 25 Mar, and that the board will provide an update by Friday 29 Mar. That’s Good Friday - a bank holiday in the UK - so hopefully they do it a little quicker.
UPDATE 5 Mar 2024, 4.05pm: Amended incorrect "12% premium" to be "20% premium".