If men buy a quarter of Spotify's songs that are streamed over a billion times, that's a big deal. Merck Mercuriades, founder of Hypnosis Song Management (HSM), a British fund that owns the rights to 65,000 popular songs, is poised to earn more than $1.9 billion. That sounds great, but it comes at a high price. Here's how it works: Hipgnosis buys the rights to songs and creates a music stock market, allowing investors to invest in these songs and receive dividends from the royalties. As the music industry moves from physical media sales to streaming, music industry royalties will reach $40 billion in 2022.
This type of investment vehicle has been around since the 1990s when David Bowie created the “Bowie Bond,” but Hipgnosis has reimagined the concept for the streaming era.Investing in top artists is expensive – despite owning assets like Amy Winehouse, acquiring song rights and valuing intellectual property has cost the company $650 million. have debt back to black There are also some Nirvana hits. The company has a public division and a private division, one open to all investors and the other held by large institutional investors. The entire organization is now facing a crisis of confidence, with financial experts claiming the fund's original structure was wrong.
Hipgnosis' extensive music portfolio had a strong 2020, but has experienced setbacks recently. Following an audit by Schott Tower Capital, the value of the company's music assets fell 26.3% to $1.9 billion. The company's revenue has fallen 21% this year, and its stock price has fallen 50% in two years. Dividend payments were suspended at the end of 2023 to address $630 million in debt. Accounting errors further reduced the portfolio's value by 7.6%. Mercuredes and its partners now need to clarify these issues to investors like BlackRock, which has since held a 50% stake. 2018. Major shareholders, including Investec Wealth (7.5%) and Asset Value Investors (6.2%), are beginning to doubt the wisdom of investing in the company.
Mercuriades is a former music executive who worked with industry heavyweights like Beyoncé and Guns N' Roses before launching Hypnosis five years ago to appeal to investment funds in the low-interest economy. Before the pandemic, the venture attracted not only songwriters but also dividend-paying, low-risk asset class investment funds. When tours had to be postponed or canceled due to the health emergency, selling music rights to make cash seemed like a smart business move.
Dark clouds are looming over this business model, which revolves around acquiring copyrights. Because song copyright fees are unpredictable, it is difficult to accurately estimate the price of song rights. Hipgnosis is currently in a battle with shareholders over a reassessment of the value of its music catalog in preparation for a future asset sale. In October 2023, 83% of shareholders rejected a $440 million rights sale to a Blackstone-owned fund. Bankers from Shot Tower Capital, hired by Hipgnosis, stepped in to address the problem of excessive debt burden and weak music income. They recalculated the value of their portfolio, cutting it by more than a quarter in March.
Shot Tower Capital stands by its assessment of the Hipgnosis catalog and identified additional concerns. The company said Hypnosis did not adhere to music industry standards and did not conduct proper due diligence in the acquisition. Schott Tower Capital cited misleading company publications that included inflated asset figures, excessive and unwarranted spending, and potential conflicts of interest with Blackstone. It is also estimated that 75% of Hipgnosis catalogs fail to meet their financial goals.
However, Hipgnosis continues to receive solid support from analysts with a price target well above its current price. For example, Liberum has a price target of 131 pounds ($164) per share, even though the stock is currently trading around 60 pounds ($75). Investec (Hipgnosis' majority shareholder) upgraded its recommendation to 'buy' despite the recent market decline. JPMorgan recommends an “overweight” position (a higher weight than the benchmark's current weight), while RBC Capital, another major Hypnosis shareholder, has a target price of £120 ($150) on the stock. It is rated as “outperform”.
new player
Acquiring the rights to popular songs was not a very lucrative asset, especially considering the price Hipgnosis paid. However, this does not deter new players from entering and changing the game. JKBX, a Spotify-backed startup, is exploring a similar concept with a twist. With approval from the Securities and Exchange Commission (SEC), the company offers rights representing a share of the copyright in individual songs. These rights can be bought and sold on the platform.one republic count the stars is one of the most expensive songs on JKBX, trading at over $31 per share and yielding 4.17% (based on 2022 copyright income and current stock price).
Another new player is Labelcoin, which emerged during the pandemic with a similar concept to JXBX. Labelcoin aims to democratize this investment type for small investors through a mobile app, similar to the SongVest app released in 2021. The company's goal is to combat “artist poverty” by raising money rather than selling copyrights to venture capitalists. Both companies have large amounts of debt. London's Roundhill Music, which operates a model similar to Hypnosis, sold part of its catalog last year to deal with 108 million pounds ($135 million) in debt. The company is currently in talks to be acquired by a venture capitalist, despite a 32% increase in sales in 2022.
On April 26, Hipgnosis faces a key shareholder vote on the future of its music catalog. Without shareholder support, the company may have to consider a restructuring or sale worth around 245 million pounds ($308). Until then, it looks like these funds will continue to sing the blues.
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