Hipgnosis Songs Fund’s catalog turned out to be worth more than a lot of people thought.

Two billion, two hundred and six million.

The approximate number of music biz lunches since Hipgnosis Songs Fund floated in 2018 at which people have suggested Merck Mercuriadis has overpaid for assets.

Not really… that’s just how it feels sometimes.

$2.206 billion is actually the amount spent in US dollars by Hipgnosis Songs Fund – via Mercuriadis – on catalogs to date, as per HSF’s latest interim report.

So, has Mercuriadis (via HSF’s longtime investment adviser, Hipgnosis Song Management) really overspent on the catalogs owned by HSF today?

We’ll address that question shortly. First, let’s discuss why it’s become even more apposite than usual.

Blackstone announced today (June 3), in tandem with HSF’s board, that it has very slightly increased its acquisition bid for HSF. (Technically, the bidding party is Lyra Bidco Ltd, using funds managed by Blackstone.)

Having beaten off a rival series of bids from Concord, Blackstone says it will now pay USD $1.31 per share in cash for HSF when it completes the deal.

That’s one cent per share higher than Blackstone’s previous bid ($1.30). It increases the total cash that Blackstone will pay for HSF’s assets to USD $1.584 billion – an increase of $12 million vs. Blackstone’s previous $1.572 billion bid.

Blackstone’s latest cash offer suggests it’s confident of winning widespread shareholder approval: The model of Blackstone’s new $1.584 billion bid is being switched to a ‘scheme’, which requires approval from over 75% of HSF shareholders; its previous acquisition bid only required 55% approval.

Right, then. With that all clear, let’s get back to what Hipgnosis Songs Fund paid for its assets… and calculate if it was worth it.

Taking debt into account

First things first: The new USD $1.584 billion bid from Blackstone (i.e., HSF’s market-approved valuation) represents HSF’s share value but doesn’t represent its full enterprise value — i.e., the full worth of the company’s assets.

The main reason for this is that enterprise value (which we’ll calculate shortly) takes into account HSF’s debt.

According to HSF’s most recent interim fiscal report, the company’s total debt stood at USD $674.0 million on September, 30 2023. This is the most up-to-date stated debt figure we have for HSF.

Now. To calculate a public company’s enterprise value using the most typical method, one must follow this equation:

• Market cap + total debt – cash = enterprise value (EV)

However, with Blackstone’s bid now publicly announced (and approved by the HSF board), we can make a tweak:

• Blackstone-bid share value + total debt – cash = EV

The first bit of this equation is pretty easy:

• $1.584 billion (the latest Blackstone cash bid) + $674 million (HSF’s total debt as of September 30) = $2.258 billion

From here, we just need to subtract HSF’s cash pile.

Again, our latest information on this topic is from HSF’s latest interim report for September 30, 2023. (This entire EV calculation estimate, in fact, is a blend of Blackstone’s latest bid and HSF financial data from September 30.)

So: On September 30, HSF’s “cash and cash equivalents” weighed in at USD $34.3 million.

So let’s do the do:

• $2.258 billion (HSF share value plus debt) – $34 million (cash) = $2.224 billion

There is, though, just one more consideration to make before we arrive at a workable EV figure.

In December, following its latest FY, Hipgnosis Songs Fund sold 20,000 songs — which it called “non-core assets” — to a mystery party believed to be Kobalt Music Group.

That cash transaction was worth approximately USD $23 million.

We must therefore also minus the proceeds from this portfolio sale from our running total to get the most accurate EV possible:

• $2.224 billion share value plus debt minus cash) – $23 million (non-core sale) = $2.201 billion

What did HSF pay again?

So… following the best possible market test for the value of HSF’s assets (i.e., a real-life acquisitive bidding war), we’ve placed a USD $2.201 billion enterprise valuation on the UK-listed fund.

To remind you, that figure is based on standard EV metrics combined with Blackstone’s latest bid, plus the most recent publicly announced figures from HSF for debt and cash.

Do you remember what HSF paid for these assets in the first place?

According to its latest interim report, it was USD $2.206 billion. (This was for September 30, 2023, but took into account the upcoming sale of the non-core assets.)

As you can see, the amount HSM paid for assets vs. the current enterprise value of those assets, are very close to the same.

However, there is one more adjustment we need to make.

To get as close as possible to the total catalog acquisition cost for HSF, we need to briefly immerse ourselves in ‘Right to Income’, or RTI.

This accounting practice at HSF has caused some controversy (notably in Shot Tower Capital’s criticism of the way HSM has used it in ‘Pro-Forma Revenue’ calculations for HSF).

However, it’s the only way to arrive at a fair net-of-RTI figure for HSF’s total acquisition spending to date.

Handily, a table in HSF’s FY 2022 annual report gives us a model for a calculation: What the ‘Pre-FY’ RTI was for acquisitions at the company from FY19 through to FY22. (HSF has not made a material acquisition since the end of FY22.)

Together, these ‘pre-FY RTI’ amounts across these years add up to approximately USD $59 million (see below).

With these amounts removed from HSF’s total catalog cost, we arrive at a new approximate figure for HSF’s net-of-RTI total spend on catalogs: USD $2.147 billion.

This, in turn, suggests that HSF’s enterprise value today ($2.201 billion) is worth a not-insignificant chunk more than the total amount the company has spent on acquisitions to date.

Your perspective on that fact will no doubt depend on where you sit in (or outside of) the music industry.

Some will argue that the value difference between HSF’s assets today and their cumulative cost should have been larger in the time frame (2018-2024).

Hipgnosis Song Management might argue that, ever since HSF’s first prospectus in 2018, it has called for a long-term “buy and hold” strategy from investors — even throughout the relatively high-interest rate environment of the past two years – with the true value of these assets yet to blossom.

HSM might also argue that the value of premium, evergreen music assets is now set for another surge – as Sony, assisted by financial partners, reportedly considers buying Queen’s catalog at a ~$1 billion valuation.

Regardless, in light of Blackstone’s latest USD $1.584 billion cash bid, the numbers suggest something you don’t often hear in today’s ultra-competitive, M&A-obsessed music business:

Accusations of dramatic overspending at Hipgnosis Songs Fund, when you do the math, sound a little out of tune.Music Business Worldwide