Shares in Hipgnosis Songs Fund rose as much as 16.5 per cent on Friday after it emerged rival music royalty firm Round Hill Music (RHM) had received a cash offer for a multimillion dollar buyout. But analysts say this does not necessarily mean the same fate awaits Hipgnosis.
After US company RHM failed to reverse a struggling share price, it saw a sudden change in fortune last week when Los Angeles-based Alchemy Copyrights offered to buy it for $469m (£376m).
Some speculated it might mean that Hipgnosis, which like RHM owns the royalties for thousands of popular songs across its catalogues, could also be dug out of a low stock price hole by a potential buyer.
Russ Mould, investment director at AJ Bell, said investors “suddenly perked up, wondering if it too will be rescued out of the doldrums with a bid”.
But analysts at Jefferies said that this is unlikely due to Hipgnosis’s “ultimately higher portfolio quality”.
A report by the financial services company said there were a number of obstacles in the way of a bid.
“Its size is one, as the $2.7bn portfolio valuation and market cap of [around] £1bn would easily represent the largest ever music catalogue transaction, if sold.”
Hipgnosis – listed as Song on the FTSE 250 – owns royalties of songs by some of the world’s biggest pop stars such as Justin Bieber, Rihanna and Ed Sheeran.
“Portfolio maturity is another, as Song has a number of relatively new catalogues still subject to a natural initial decay in revenue…which are more difficult to value for the purpose of a bid,” Jefferies said.
They added that the board of RHM rejected several approaches before settling on a “presumably higher” offer from Alchemy Copyrights, which gives Hipgnosis a more positive valuation readacross.
However, Mould cautioned investors not to purchase any stock in the hope of it receiving a bid.
Why aren’t music royalty funds doing well?
The underlying question is why the once popular music royalty fund is no longer a hit.
“For a brief moment, music royalty-related investments were all the rage,” said Mould, explaining that they were helped by Covid-19 as they tore off touring income for musicians who sold their royalties to maintain glamorous lifestyles.
However, interest rates soon got the better of investors.
“What investors failed to appreciate was that music investment vehicles would be less attractive when interest rates shoot up. They created their business model when rates were next to nothing, but rates suddenly going to four per cent or five per cent suddenly changes the story,” Mould explained.
Like RHM, Hipgnosis is also grappling with a dwindling share price, which recently led investors to urge the company to sell some of its holdings.
Responding to these calls, Merck Mercuriadis, Hipgnosis boss and founder, said he was “aligned” with shareholders in this regard and is working on options to increase value for them.