When Hipgnosis Songs Fund was launched on the London stock market in 2018, investors hailed it as an innovative way to buy alternative media assets. The fund, founded by Merck Mercuriadis, a music industry veteran, aimed to turn music rights into a mainstream asset by using royalties, such as from streaming and performances, to generate investor income. It built a portfolio of more than 100 catalogues, with over 40,000 songs, including by Blondie, 50 Cent and Shakira.
Yet the market has found Hipgnosis difficult to value, especially as higher interest rates have pushed up its discount rate and slashed song rights valuations. This, combined with governance issues, boardroom upheaval and conflicts with some of the artists themselves, has caused its shares to languish. In the first three months of the year, the trust traded at an average 21 per cent discount to its net asset value.
A takeover represents the best way out for shareholders. Blackstone, the asset manager, has agreed to acquire the fund for $1.30 a share, or 104p in sterling terms. It marks a 4 per cent premium to a $1.25 competing offer from Concord, a buyout industry rival backed by Apollo, last week. The Blackstone bid is also at a 48 per cent premium to Hipgnosis’s closing share price before takeover interest re-emerged last month.
This will come as a relief to shareholders, especially given that they voted against the continuation of the fund in October. The Blackstone deal values Hipgnosis at about $1.6 billion, equivalent to £1.3 billion on the exchange rate at the time. But since this still places it about 17 per cent below its peak of 126p in 2021, does it represent fair value for shareholders?
Blackstone, which has made three previous offers for the fund, is also the majority owner of Hipgnosis Songs Management, Hipgnosis’s investment adviser, through which it retains a “call” option. This means it has the right to buy the fund’s music portfolio if and when its agreement with the fund is terminated. It’s a significant deterrent for rivals, for they could face losing the music assets even if they won the bid. The company also has a separate $1 billion fund called Hipgnosis Songs Assets to acquire music rights catalogues, which is also managed by Hipgnosis Songs Management.
Blackstone clearly has an incentive to bring Hipgnosis Songs Fund under this umbrella. Analysts at Stifel, the broker, think the asset manager may even be overpaying by as much as $150 million, compared with what it could have paid last year. This was when the call option deterrent was much stronger, before a review suggested Hipgnosis Songs Management’s calculation of the trust’s operating net asset value was inaccurate. The report made it easier for potential bidders to sack Hipgnosis Songs Management as the trust’s adviser, removing the risk of its call option.
The review was widely expected to be critical, putting Blackstone on the back foot. It is not clear why the asset manager waited until it was in a weaker position to present a new offer, but the fact it has accepted it must offer a higher price suggests it is determined to bring the fund under its ownership.
It is unclear whether Concord has the appetite to counter Blackstone. Ultimately, it may depend on its strategic ambitions: paying a few hundred million dollars extra for Hipgnosis may pay off in the long run if it means gaining ground over Blackstone in the music sector.
Market expectations of another bid may be beginning to dwindle. Too many investors have been burnt by Hipgnosis during its short life on London’s market.
Advice Hold
Why Lack of market confidence in Hipgnosis suggests it is better off in private ownership
Whitbread
The owner of Premier Inn as well as pub-restaurants such as Brewers Fayre, is growing at an impressive pace. Whitbread, which traces its origins back to 1742, recorded adjusted pre-tax profits of £561 million in its latest financial year, with the return on capital employed — which measures how effectively it turns investments into profit — at a healthy 13 per cent. Revenue per available room, otherwise known as revpar, a key industry metric, rose by a tenth to £65.56.
The company has struggled with weak food and beverage sales since the pandemic, so the decision to close 238 sites will be welcomed by some. About 112 restaurants will become new hotel rooms and 126 restaurants will be sold off. However, it means that of its 37,000 strong workforce, an estimated 1,500 people will lose their jobs.
The move is part of Whitbread’s wider “accelerating growth plan”, which it believes will feed into better margins and returns for its British business, after a one-off impact of £20 million to £25 million in its adjusted pre-tax profits in its present financial year. By 2027, it expects to add an extra £30 million to £40 million in adjusted pre-tax profits, rising to £80 million to £90 million in 2029.
In Germany, where the company is expanding, it suffered an adjusted pre-tax loss of £36 million, but said it was on course to break even in the region by the end of 2024.
Whitbread increased its final dividend by 26 per cent, taking its forward yield to a respectable 3.8 per cent. Income investors will be pleased, too, that it said it would buy back £150 million of its shares.
The shares are inexpensive, trading at a forward price-to-earnings multiple of 14, about half the high of 32 in 2022. This column rated Whitbread as a “hold” a year ago and since then it has risen by just under 5 per cent. There is still some uncertainty about how much momentum from pandemic recovery the company has spent, but promising progress in its growth plan, including its expansion in Germany, suggests the shares are worth holding on to.
Advice Hold
Why Good growth progress but still some uncertainty around trading momentum
