Description

Hipgnosis, which was founded by Merck Mercuriadis, is a Guernsey registered investment company established to offer investors a pure-play exposure to songs and associated musical intellectual property rights. The Company has raised a total of over £625 million (gross equity capital) through its Initial Public Offering on 11 July 2018, and subsequent issues in April 2019, August 2019 and October 2019. In September 2019, Hipgnosis transferred its entire issued share capital to the Premium listing segment of the Official List of the FCA and to the London Stock Exchange’s Premium segment of the Main Market.Vast majority of the portfolio is on the publishing rights. Only a few master rights. It’s all permanent with a % split. In short, you are buying a YieldCo w/ returns derived from songs sold to streaming platforms, with additional cap gains potential from M&A synergies.

There is a limited time to acquire good assets at 8-10% type yield over the next 3-5 years -- and so far in the market today according to management is the big 3 + “a bunch of suits” (i.e. PE shops) rolling up these assets. The special sauce comes down to identifying, valuing, and maximizing individual catalogues:

• Mr Mercuriadis -- the founder and CEO, has managed artists from Elton John to Guns N’ Roses, previously led UK-listed Sanctuary Records. Born out of Iron Maiden’s catalogue, Sanctuary grew to be the biggest independent music company in the world, publishing and managing artists including Beyoncé, Dolly Parton and Morrissey before it almost collapsed and was sold to a rival.
• Hipgnosis targets deals with the sometimes obscure songwriters behind the huge contemporary hits of artists including Adele, Maroon 5 and Ed Sheeran, building on a bedrock of older songs by the likes of Chic guitarist Nile Rogers and Dave Stewart of the Eurythmics, both of whom are advisers to the company. Mr Mercuriadis said songwriters had become “the most important person” in the industry because modern artists had turned to professionals to pen their hits. He said the three biggest catalogues in the industry were owned by the three largest recorded music companies — Universal, Sony and Warner — which take the “cream on the cake” driven by the streaming boom. “We are a very powerful aphrodisiac for the songwriting community,” he said. Hipgnosis also hopes to extract more value from the “stiffs” and undervalued hits in its catalogue.
• Decay analysis with detailed historical data on how a catalogue with fare (if it’s new). For vintage catalogue, there’s much less question on decay. If it’s 20 years ago it’s the steady state of last 5 years. Those owners are slightly more savvy but also hurt by the decline. May need to pay slightly higher multiple.

• Aside just from the price, the seller (who may not sell 100% of it) also cares about whether the work remains relevant -- which opens up room for synergy: (a) Put songs on new setting, put into new mixes, new channels, etc, (b) Vs. other financial buyers, when SONG acquires, it has an advisory board attached to the catalogue with the likes of real artists advising on what to do with it -- also try to to connect them with each other + plugging the right people in the right places.

The firm had already purchased catalogs from numerous hitmakers like Timbaland, Jack Antonoff (Taylor Swift, Lana Del Ray, Lorde), Savan Kotecha (Ariana Grande, One Direction, Justin Bieber, The Weeknd) and The Chainsmokers, who topped Forbes’ Highest-Earning DJ’s list in 2019. Despite the global economic uncertainty fueled by the ongoing health crisis, Mercuriadis told Rolling Stone that he’s “never had more opportunities than I have in the last four weeks because of the uncertainty in the world, and it’s a good time now to look at risks in the future and sell their songs...” . The firm recently received a 188 mm credit facility from the syndicate of 7 banks and looks to continue on this path of M&A (likely in an environment where financial buyers find it difficult to tap funding + where sellers are in more desperate need for cash).

The return math is pretty straight forward -- there are still US + EU catalogues out there of around 250 - 500 mm USD, also a big blue-space for Afro-Carribean that tend to travel well into all continents, and there’s some increasing interest in the K-Pop side of things as well as Nigeria. Acquire the very best catalogues w/ ~30-40% of NAV in leverage. The firm targets ~5% type organic growth (mostly pricing w/ synergies, mix, and getting onto more platforms / charging more platforms license fees), while maintaining a sustainable ~5 pence dividend (5% yield today).

In other words, by investing in SONG LN, one is hiring a rock-star-type “music IP bond” small-cap investment manager to do the investment + value-creation for you. This is a long-term 5-10% corporate-bond replacement (levered to all the right trends) with half its return via cold-hard cash (dividend), and the other half via the spread between inflation-protected pricing power in songs (in a world where streaming & long-tail IP consumption becomes omnipresent) and the ever-decreasing interest rate towards 0-1%. Eventually when the firm reaches 3-5 Bn USDin size, odds is high that the founding team sells it at a ~3-5% yield to the big 3 or any other streaming platforms as a strategic exit.

Catalyst

Hold onto it for 5-10% return per annum as a bond replacement.