REG - Hipgnosis Songs Fund - Asset sales to fund buy backs and reduce debt

Hipgnosis Songs FundAnnouncement

14/09/2023 07:15

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RNS Number : 4385M  Hipgnosis Songs Fund Limited  14 September 2023

This announcement contains inside information for the purposes of the UK
Market Abuse Regulation.

 

LEI: 213800XJIPNDVKXMOC11

Hipgnosis Songs Fund Limited ("Hipgnosis Songs Fund" or the "Company")

Hipgnosis Songs Fund agrees sale of 29 Catalogues to Hipgnosis Songs Capital
to fund a share buy back programme and reduce debt as part of strategic
proposals designed to narrow the discount and re-rate the Company's share
price

14 September 2023

The board of directors of Hipgnosis Songs Fund Limited (the "Board"), the
first UK listed investment company offering investors a pure-play exposure
to songs and associated intellectual property rights, and its investment
adviser, Hipgnosis Song Management Limited ("HSM" or the "Investment
Adviser"), are pleased to announce proposals which they believe will act as a
catalyst for a re-rating of the Company's share price:

·    Catalogue sales for aggregate gross consideration of $465 million;

·    Share buy back programme of up to $180 million;

·    Repayment of $250 million drawn under the Company's revolving credit
facility ("RCF"); and

·    Introduction of additional, lower investment advisory fee tiers.

These proposals are subject to, amongst other things, shareholder approval of
all required resolutions at an Extraordinary General Meeting ("Extraordinary
General Meeting" or "EGM") and the 2023 Annual General Meeting ("2023 AGM")
which are both expected to be held no later than 25 October 2023.

Strategic rationale

The Board and the Investment Adviser believe that, over the last 18 months,
the Company's share price has not reflected the fundamental value of the
Company.

A consultation with major shareholders in Spring 2023 confirmed that whilst
shareholders continued to believe in the Company's significant long-term
growth opportunity, a proactive approach to addressing the current share
price, including a meaningful share buy back programme and reduction in the
Company's revolving credit facility drawings, was important.

These disposals are of the smallest magnitude possible that would provide the
required capital to execute on this strategy, whilst ensuring that the ongoing
investment case for Hipgnosis Songs Fund remains intact by protecting the
strength of the remaining portfolio.

The Board and the Investment Adviser continue to believe that the best way to
maximise long-term shareholder value is to buy, hold and actively manage
culturally important assets that will deliver income and capital growth over
time. Furthermore, they believe that the Company's long-term value has yet to
be fully realised.

This opportunity for growth was demonstrated in the financial year ended 31
March 2023 when the Company reported its best like-for-like income growth to
date of 12.1% year-on-year. The Board and the Investment Adviser are confident
of showing strong further growth as the Company benefits from the structural
tailwinds of the continued monetisation of music consumption and the
Investment Adviser adds value through active Song Management.

Proposed transactions

First portfolio

Firstly, the Company has agreed the sale of 29 music catalogues (the "First
Disposal Portfolio") for cash consideration of $440 million, reflecting a
multiple of 18.3x historical Net Publisher Share, to Hipgnosis Songs Capital,
a partnership between Hipgnosis Song Management and funds managed and/or
advised by Blackstone (the "First Disposal"). The First Disposal is expected
to realise a total net return of 44% over a 3 year weighted average life of
ownership.

·    The First Disposal Portfolio was designed to protect the strength of
the remaining portfolio after completion of the First Disposal, as follows:

o  Hipgnosis Songs Fund will retain 81% of its existing portfolio by Fair
Value with an increased focus on older vintages (First Disposal Portfolio
average vintage being 2008, compared to existing portfolio average of 2003);

o  The remaining portfolio is expected to deliver strong income growth over
the medium term;

o  The remaining portfolio will have an increased concentration of culturally
important and successful songs, with the Company retaining an interest in 47
of Rolling Stone's 500 Greatest Songs of All Time (existing portfolio has 52
of these songs) and 85 Spotify Billions Club (existing portfolio at 12
September 2023 has 106/473); and

o  Hipgnosis Songs Fund will retain its ownership in seven of its ten largest
catalogues.

·    All catalogues would continue to be managed by Hipgnosis Song
Management, maintaining the goodwill of Artists and Songwriters and enabling
the Investment Adviser to maximise income by Song Management of the Company's
remaining portfolio.

·    The First Disposal purchase price reflects:

o  A premium of 26% to acquisition price of the First Disposal Portfolio;

o  A premium of 51% to the valuation of the First Disposal Portfolio implied
by the Company's 30-day average market capitalisation up to 13 September 2023;
and

o  A discount of 17.5% to the fair value of the First Disposal Portfolio as
at 31 March 2023.

·    The First Disposal is conditional upon, inter alia, the approval of
the sale (the "Asset Sale Resolution") by independent shareholders at the EGM
and the approval by shareholders of the continuation resolution (the
"Continuation Resolution") at the Company's 2023 AGM.

On the basis of the terms agreed with Hipgnosis Songs Capital, the Company
expects to pay approximately $6.7 million in corporation tax. By use of the
Company's tax losses, it has been possible to mitigate the majority of the
Corporation Tax which would otherwise have been payable on the accounting
profit on the sale of these assets.

Second portfolio

Secondly, the Company has agreed in principle, subject to completion of legal
documentation and the consent of the Company's lending banks, to sell a
portfolio of non-core songs (the "Second Disposal Portfolio") for a
consideration of approximately $25 million (the "Second Disposal").

The Second Disposal Portfolio songs were acquired as part of Kobalt Fund One
and their eventual sale was part of the Company's acquisition strategy, as
they were considered non-core as the Company does not have perpetual ownership
rights or the songs require ongoing accounting and reporting obligations that
take up significant bandwidth which can be better focused on active Song
Management.

Use of proceeds

The Company intends to use the net proceeds of the disposals to establish a
share buy back programme of up to $180 million; repay $250 million of the
Company's drawings under its revolving credit facility; and enhance financial
flexibility. Given the substantial share price discount to fundamental value
in recent months, share buy backs enable the Company to invest further into
the remaining portfolio at a material discount to its fundamental asset value.

Investment Advisory Agreement

In addition, the Company has agreed an amendment to the Investment Advisory
Agreement in place between the Company and the Investment Adviser such that,
subject to completion of the First Disposal to Hipgnosis Songs Capital, the
calculation of the annual advisory fee payable by the Company to the
Investment Adviser will be amended to include additional lower tiers, as are
set out in the Amendment to Investment Advisory Agreement section below. This
is expected to provide the Company with lower ongoing operating costs whilst
maintaining the Investment Adviser's alignment with the Company's share price
performance.

Related party considerations

The Investment Adviser is majority owned by funds managed and/or advised by
Blackstone, which together also own the majority of interests in Hipgnosis
Songs Capital, the proposed purchaser of the First Disposal Portfolio. The
proposed sale of the First Disposal Portfolio to Hipgnosis Songs Capital
therefore constitutes a related party transaction for the purposes of Listing
Rule 11 and is conditional upon, among other things, the approval of the
Company's independent shareholders at the EGM to be convened for that purpose.

Given that Hipgnosis Songs Capital and the Investment Adviser are under common
control and, additionally, the Investment Adviser acts as investment adviser
to Hipgnosis Songs Capital, the Board put in place appropriate governance
arrangements and information barriers to ensure the continued availability to
it of a segregated team of the Investment Adviser to consider and advise on
the First Disposal, none of whom were available to or have any financial
interest in Hipgnosis Songs Capital.

In addition, the Company notes that Mr Mercuriadis, and certain employees of
Hipgnosis Song Management, have disclosed to the Board that they hold a
minority interest in the share capital of Hipgnosis Songs Capital.

Go-Shop provision

The terms of the First Disposal include a "Go-Shop" provision, pursuant to
which the Board is entitled to solicit alternative offers for the First
Disposal Portfolio for a period of 40 days from the date of this announcement.
Hipgnosis Songs Capital has the right to match any Superior Proposal (as
defined below). The Company may terminate the agreement if it receives and
settles the transaction documents in respect of a Superior Proposal and
Hipgnosis Songs Capital does not match that proposal within 5 Business Days of
having been notified by the Company. On any such termination a fee of $6.6m
will be payable by the Company to Hipgnosis Songs Capital. In determining
whether to exercise any termination right the Board will act in the best
interests of shareholders including considering whether any such Superior
Proposal, if completed, would result in higher aggregate cash net proceeds and
deliver greater long-term value to the Company's shareholders.

Full details of the terms of the Go-Shop provision are set out in the
Principal Terms of the First Disposal section below.

Shareholders will be notified via a Regulatory Information Service of the
outcome of the Go-Shop process in due course and in any event before the EGM
and 2023 AGM are held.

In the event a Superior Proposal is received during the Go-Shop period the
Board expects it will be necessary to adjourn the EGM and 2023 AGM, no later
than 30 November 2023.

Background to the recommendation

The Board and the Investment Adviser believe these proposals provide an
attractive opportunity for the Company to re-rate its share price and
strengthen its platform to deliver future income and capital growth.

The Board considers the proposals described in this announcement and the
passing of the Asset Sale Resolution, the Continuation Resolution and each of
the other resolutions to be proposed by the Board at the 2023 AGM to be in the
best interests of the Company and its shareholders taken as a whole.
Accordingly, the Board intends to unanimously recommend that shareholders vote
in favour of these resolutions at the EGM and the 2023 AGM, as appropriate, in
due course.

The Company intends to publish a circular which is expected to be posted to
Company shareholders no later than 27 September 2023 which will include the
notice convening the Extraordinary General Meeting, expected to be no later
than 25 October 2023, to consider and, if thought fit, to pass, the Asset Sale
Resolution. The circular will also contain a notice convening the 2023 AGM for
the same date.

The Board and the Investment Adviser are committed to on-going engagement with
shareholders on the Company's future strategy, with a second Continuation Vote
scheduled to be held at the Annual General Meeting in 2028.

J.P. Morgan Cazenove is acting as sponsor and financial adviser to Hipgnosis
Songs Fund in respect of the First Disposal.

Merck Mercuriadis, CEO and Founder of Hipgnosis Song Management and Founder
of Hipgnosis Songs Fund said:

"Earlier this year we initiated consultations with shareholders, in
contemplation of the Continuation Vote and our concerns that the true value of
our iconic songs was not being reflected in our share price. It was clear that
shareholders shared our belief in the continuing long-term opportunity of
Hipgnosis Songs Fund and wished to see a significant share buy back programme
and reduction of our leverage in order to deliver a re-rating in the share
price.

"The transactions announced today allow us to execute on that strategy and
reflect our determination to deliver immediate shareholder value and enhance
the Company's position to deliver long-term exceptional returns and capital
growth through our investment strategy of 'buying, holding and actively
managing' a major portfolio of iconic songs as they benefit from the continued
growth of streaming.

"I'm delighted that through this transaction with Hipgnosis Songs Capital, not
only are we able to execute the strategy of share buy backs and reducing
leverage but also give clear transactional evidence, alongside other recent
transactions in the market, of the current realisable value of the Company's
catalogues to help investors understand and have confidence in the Company's
asset value. The purchase price of the sale of catalogues to Hipgnosis Songs
Capital realises a total return of 44%, which validates our investment
strategy despite the current economic challenges.

"In transacting with Hipgnosis Songs Capital, and reflecting both my own and
Hipgnosis Song Management's relationship with Hipgnosis Songs Fund and
Hipgnosis Songs Capital, our responsibility and duty of care to Hipgnosis
Songs Fund's shareholders has been of paramount importance. For that reason,
our focus throughout has been to execute a strategy designed to re-rate the
share price while protecting the quality of the remaining portfolio, which
going forward will have a greater focus on older vintage songs and retain the
majority of the Company's largest catalogues. An important part of that
responsibility has been to include a "Go-Shop" provision which importantly
Hipgnosis Songs Capital would have the right to match. This ensures the
highest level of corporate governance and shareholder protection.

"Equally importantly, our Company's success has been built upon our ethos and
commitment to Songwriters to be conscientious custodians of their songs. With
these deals, Hipgnosis Song Management will continue its management of all our
catalogues acquired from Songwriters, Producers and Artists by Hipgnosis Songs
Fund ensuring we maintain our ethos and protect Hipgnosis' unique ability to
work with Songwriters, Producers and Artists to maximise income and capital
growth. The importance of this is understood and acknowledged by our
shareholders.

"I believe these deals will deliver immediate value for shareholders through a
re-rating of the shares and position Hipgnosis Songs Fund to deliver superior
returns to shareholders over the medium and long-term.

"The Company recently delivered the best like-for-like results in its history
and is in a perfect position to capitalise on the demonstrated pricing power
of the DSPs, the successful passing of CRB III and CRB IV and songwriters
being paid at the highest rates ever in the streaming era as we see more than
a billion paid subscribers to music streaming services in sight. All this
gives us great confidence for the future.

"With the support of our shareholders in the continuation vote, Hipgnosis
Songs Fund will move forward stronger than before with a portfolio of
culturally significant, iconic songs that will be listened to for decades to
come, providing long-term resilient income streams and the potential for
significant capital growth."

Andrew Sutch, Chairman of Hipgnosis Songs Fund said:

"As a Board, we have been clear for some time that the Company's share price
does not fully reflect the value of Hipgnosis Songs Fund's Portfolio. Having
consulted with many of our largest shareholders, considered a wide range of
options and taken independent advice we are confident the proposals set out
today provide a compelling opportunity to deliver immediate shareholder value
whilst protecting our ability to deliver superior returns over the medium
term.

"These proposals will enable the Company to instigate a substantial share buy
back programme and reduce its debt whilst enhancing the quality of the
remaining Portfolio and ensure we maintain the goodwill of Songwriters and
Artists, helping the Investment Adviser maximise future shareholder value
through Song Management.

"Importantly, whilst the Company has been consistent in its view that the best
way to realise the long-term value from its assets is to hold in perpetuity,
given the Company's recent share price, the sales of a small proportion of the
Company's portfolio will enable the launch of a material share buy back
programme which we believe will result in a significant re-rating of the
Company's share price and enables the Company to invest further into its
remaining portfolio at a material discount to its fundamental asset value.

"With the sale price of the First Disposal, Hipgnosis Songs Fund would be
realising a 44% total return for shareholders, highlighting the continuing
opportunity of the remaining portfolio in the future.

"At every step, the Board has been focused on acting in the best interests of
the Company's shareholders. Therefore, noting the related party aspect of the
proposals, we have ensured strong corporate governance controls and
shareholder protections have been core to the First Disposal, including a
Go-Shop Period to ensure that the Company realises the best available
transaction for the First Disposal Portfolio, as well as these proposals being
subject to shareholder approval alongside the forthcoming Continuation
Resolution.

"We believe the proposals set out today provide the best way to balance
immediate shareholder value with the exciting longer-term prospects for the
Company. Therefore, the Board intends to unanimously recommend shareholders
support these proposals and vote in favour of the resolutions at the
Extraordinary General Meeting and the 2023 AGM."

 

Expected Timetable

 

 Transaction announcement                                                        14 September 2023
 Latest date for posting of shareholder circular and Notice of EGM and AGM       No later than 27 September 2023
 Announcement of the results of the Go-Shop                                      24 October 2023
 Date of AGM and EGM (in the event no Superior Proposal is received pursuant to  No later than 25 October 2023
 the Go-Shop)
 Date of AGM and EGM (in the event a Superior Proposal is received pursuant to   No later than 30 November 2023
 the Go-Shop)
 Expected completion of First Disposal to Hipgnosis Songs Capital                T+13 business days from date of AGM and EGM

 

Analyst call

Andrew Sutch (Chair of Hipgnosis Songs Fund), Merck Mercuriadis (CEO and
Founder of Hipgnosis Song Management) and Chris Helm (CFO on behalf of
Hipgnosis Songs Fund) will be holding a call for analysts at 1100 BST today.

To register to participate, please contact
hipgnosissongsfund@headlandconsultancy.com
(mailto:hipgnosissongsfund@headlandconsultancy.com) .

 For further information please contact:

 For Hipgnosis Song Management                                                  +44 (0)20 4542 1511

 Merck Mercuriadis

 Ben Katovsky

 Giles Croot
 Teneo - Financial PR to HSM                                                    +44 (0) 20 7353 4200

 James Macey White / Ed Cropley
 For Hipgnosis Songs Fund                                                       +44 (0) 20 4542 1530

 Andrew Sutch

 Rufina Pavry (Investor Relations for Hipgnosis Songs)
 Headland Consultancy - Financial PR to Hipgnosis Songs Fund

 Susanna Voyle / Del Jones / Charlie Twigg                                      +44 (0) 20 3805 4822
 The Outside Organisation                                                       +44 (0)7711 081843

 Alan Edwards/ Nick Caley
 Fran DeFeo PR                                                                  +1 917 767 5255

 Fran DeFeo                                                                     frandefeopr@gmail.com (mailto:frandefeopr@gmail.com)
 J.P. Morgan Cazenove - Sponsor, Financial Adviser and Corporate Broker         +44 (0)203 493 8000

 William Simmonds / Jérémie Birnbaum (Corporate Finance)
 Singer Capital Markets - Corporate Broker                                      +44 (0)20 7496 3000

 James Moat / James Maxwell / Angus Campbell (Corporate Finance)

 Alan Geeves / James Waterlow / Sam Greatrex (Sales)
 RBC Capital Markets -Corporate Broker                                          +44 (0)20 7635 4000

 Elliot Thomas / Max Avison (Corporate Finance)

 Lisa Tugwell / Natalia Lipecka (Sales)
 For Blackstone                                                                 +44 (0)7918 360372

 Rebecca Flower/ Louis Clark                                                    Rebecca.flower@blackstone.com (mailto:Rebecca.flower@blackstone.com)

                                                                                Louis.clark@blackstone.com (mailto:Louis.clark@blackstone.com)
 Goldman Sachs International - Financial Adviser for Hipgnosis Songs Capital    +44 (0) 20 7774 9451

 Chris Emmerson / Michael Ryan-Southern

FURTHER INFORMATION

Benefits of the proposals

Hipgnosis Songs Fund was launched by Merck Mercuriadis in 2018, helping to
establish music as a new asset class and providing the investment community
with access to extraordinarily successful and culturally important songs.
Since its initial public offering ("IPO"), the Company has built a portfolio
of songs unrivalled for its extraordinary success and cultural importance.
This has enabled the Company to provide shareholders with a stable dividend
and an implied strong capital return based on the value of the Company's
assets.

The core investment case remains unchanged from the Company's IPO: that the
continuing long-term growth of revenue in the music industry and the ability
of the Investment Adviser, to drive additional value through active Song
Management of a portfolio of iconic songs, will deliver an attractive
shareholder return. The latest Full Year Results were an important validation
of this strategy, delivering the best like-for-like income growth in the
Company's five-year history.

The Board and the Investment Adviser believe the Company's portfolio will
continue to have opportunities for significant further income and capital
growth. Music markets remain buoyant as they continue to benefit from the
increased adoption and monetisation of paid for music streaming, whilst
technological developments continue to deliver new revenue streams and
legislative changes increase the share of Digital Service Providers (DSP)
revenues going to owners of Songwriter rights. Despite this, the fundamental
value and opportunity of the Company fails to be reflected in its current
share price. Whilst recognising that this is partly due to economic
conditions, as well as music and song catalogues being a relatively new asset
class, the Board and the Investment Adviser are determined to take action to
address the current share price.

As outlined in the Full Year Results published on 13 July 2023, the Board and
the Investment Adviser have consulted with many of the Company's largest
shareholders. These conversations confirmed that many shareholders share the
view that Hipgnosis Songs Fund offers a strong long-term growth opportunity
and that corporate activity which would enable a share buy back and partial
repayment of debt should be undertaken.

As a result, the Company proposes to dispose of two portfolios of music
catalogues. These disposals are of the smallest magnitude possible that would
provide the required capital to execute on this strategy, whilst ensuring that
the fundamental investment case for Hipgnosis Songs Fund remains intact by
protecting the strength of the remaining portfolio.

Firstly, the Company has entered into an agreement, subject to, amongst other
things, shareholder approval, to sell 29 music catalogues for an aggregate
cash consideration of $440 million to Hipgnosis Songs Capital, a partnership
between Hipgnosis Song Management and funds managed and/or advised by
Blackstone. Secondly, it has agreed in principle to sell a portfolio of
non-core songs for a consideration of approximately $25 million.

The prices achieved on these two disposals validate the Board and the
Investment Adviser's view that the realisable value of the Company's assets,
even in the current challenging market environment, is at a material premium
to the value implied by the current share price.

The disposals will realise significant net proceeds that can be used to
deliver immediate shareholder value by the Company acquiring its own shares
through the establishment of a share buyback programme of up to $180 million
(subject to shareholder approval at the forthcoming 2023 AGM). In addition,
the Company intends to materially reduce its drawings under its RCF by $250
million.

The Board has agreed an amendment to the Investment Advisory Agreement with
the Investment Adviser such that the calculation of the annual advisory fee
payable by the Company to the Investment Adviser will be amended if the First
Disposal is completed to Hipgnosis Songs Capital. The introduction of new
tiers of reduced fees, calculated by reference to the Company's market
capitalisation, is expected to provide the Company with lower ongoing
operating costs whilst maintaining the Investment Adviser's alignment with the
Company's share price performance.

Background to the First Disposal and relationship with Hipgnosis Songs Capital

Prior to agreeing the terms of the First Disposal, the Board evaluated various
options that might provide a catalyst to increase the share price. Considering
the strategy of ensuring that the remaining Company was positioned more
strongly than before, the Company approached Hipgnosis Songs Capital as it
believed it would have an interest in protecting the long-term success of
Hipgnosis Songs Fund given its relationship with Hipgnosis Song Management.

As a result, the Board have been able to negotiate a transaction which ensures
an improvement in the remaining portfolio but also delivers what all parties
believe reflects a fair market price in today's market conditions.

In agreeing a deal with Hipgnosis Songs Capital, the Board notes that the
responsibility for management of these Songs will remain with the Investment
Adviser. The Board believes that this will be welcomed by Songwriters and
Artists whose songs remain with Hipgnosis Songs Fund and, given the Company's
ethos as a home that ensures that Songs are managed effectively and with
respect, will ensure the continued goodwill of all Songwriters and Artists who
have sold their Songs to the Company. This will enable the Investment Adviser
to continue working closely with the Company's remaining Songwriters and
Artists in order to maximise future value for shareholders through active Song
Management

The Investment Adviser to the Company is majority owned by funds managed
and/or advised by Blackstone, which together also own the majority of
interests in Hipgnosis Songs Capital. The proposed sale of the First Disposal
Portfolio therefore constitutes a related party transaction for the purposes
of Listing Rule 11 and, accordingly, is conditional upon, inter alia,
independent shareholder approval at the Extraordinary General Meeting. The
First Disposal is also conditional on shareholder approval of the Continuation
Resolution at the 2023 AGM.

Given that Hipgnosis Songs Capital and the Investment Adviser are under common
control and, additionally, the Investment Adviser acts as investment adviser
to Hipgnosis Songs Capital, the Board put in place appropriate governance
arrangements and information barriers to ensure the continued availability to
it of a segregated team of the Investment Adviser to consider and advise on
the First Disposal, none of whom were available to or have any financial
interest in Hipgnosis Songs Capital.

Furthermore, the terms of the First Disposal include a Go-Shop provision (as
set out in the Principal Terms of the First Disposal below).

Information on the First Disposal

The Company has entered into an agreement, subject to shareholder approval, to
sell 29 catalogues for an aggregate cash consideration of $440 million,
reflecting a multiple of 18.3x historical Net Publisher Share.

The average vintage of these catalogues is 2008, compared to the Company's
existing average vintage of 2003, meaning that the sale will reduce the
Company's exposure to 'younger' catalogues.

The First Disposal Portfolio was designed to protect the strength of the
remaining portfolio, and subject to completion of the First Disposal the
remaining portfolio:

·    Is expected to deliver strong income growth over the medium term;

·  Will have an increased concentration of culturally important and
successful songs, with the Company retaining an interest in 47 of Rolling
Stone's 500 Greatest Songs of All Time (existing portfolio has 52 of these
songs) and 85 Spotify Billions Club (existing portfolio at 12 September 2023
has 106/473); and

·   Continued ownership in seven of its ten largest catalogues.

If the First Disposal to Hipgnosis Songs Capital completes, all catalogues
would continue to be managed by Hipgnosis Song Management, maintaining the
goodwill of Artists and Songwriters and enabling the Investment Adviser to
maximise income by Song Management of the Company's remaining portfolio.

The First Disposal Portfolio, which is set out in the table below, accounted
for 19% of the Company's Portfolio by value as of 31 March 2023 and 19% of
Pro-Forma Annual Revenue ("PFAR") for the year ended 31 March 2023:

 Catalogue                 Vintage  Catalogue                     Vintage  Catalogue                 Vintage
 Poo Bear                  2015     Brian Kennedy                 2009     Happy Perez               2012
 Jon Bellion               2007     Brian Kennedy (Writer share)  2010     RedOne                    2009
 Martin Bresso             2014     Ian Kirkpatrick               2016     LA Reid                   1990
 Kaiser Chiefs             2007     Ari Levine                    2012     Steve Robson              2011
 Ed Drewett                2015     Joel Little                   2016     Bob Rock                  2003
 Espionage                 2010     Rico Love                     2011     Shakira                   2012
 Sean Garrett              2011     Elliot Lurie                  1971     Fraser T Smith            2011
 Terius Gesteelde-Diamant  2010     Lyric Catalogue               1997     Eric Stewart              1977
 Brian Higgins             2000     Barry Manilow                 1989     Tricky Stewart (Masters)  2009
 Rick James                1984     Nelly                         2002

 

The First Disposal purchase price reflects:

·    A total net return of 44% over a 3 year weighted average life of
ownership;

·    A premium of 26% to acquisition price of the First Disposal Portfolio;

·    A premium of 51% to the valuation of the First Disposal Portfolio
implied by the Company's 30-day average market capitalisation up to 13
September 2023;

·    A discount of 17.5% to the Fair Value of the First Disposal Portfolio
as at 31 March 2023; and

·    A premium of 39% to the IFRS book value as at 31 March 2023, under
which the Company's investments in Catalogues are held at cost less
amortisation and impairment.

On the basis of the terms agreed with Hipgnosis Songs Capital, the Company
expects to make payments of approximately $6.7 million in corporation tax and
$13.9 million in transaction fees. By use of the Company's tax losses, it has
been possible to mitigate the majority of the Corporation Tax which would
otherwise have been payable on the accounting profit on the sale of these
assets. This announcement does not constitute or describe an updated Operative
NAV of the Company. The Company will next produce an updated Operative NAV as
at its interim reporting date, 30 September 2023, which will take into
consideration, inter alia, the impact of these proposals.

Principal Terms of the First Disposal

Under the terms of the Master Sale Agreement between the Company and Hipgnosis
Songs Capital, (the "Agreement"), Hipgnosis Songs Capital will acquire the
First Disposal Portfolio following satisfaction of, or waiver, of the
completion conditions for a total consideration of $440 million, payable in
cash with at least 80% of the total consideration payable on completion. The
remainder will be paid on a pro rata basis once acknowledgements of letters of
direction in respect of payments for the royalties representing more than 80%
of the anticipated revenue of the First Disposal Portfolio have been received
from relevant counterparties. If such acknowledgements have not been received
within 6 months of the completion date in respect of any catalogue, the
Company will have the option to repurchase such catalogue on the same terms
(provided that Hipgnosis Songs Capital shall not be required to provide
warranties, representations, covenants or indemnification other than to the
limited extent relating to the period between closing and the date of
repurchase), subject to Hipgnosis Songs Capital's right to release the
holdback amount in lieu of such repurchase.

As part of the First Disposal, the Company has agreed to assign to Hipgnosis
Songs Capital ownership of all royalties and other compensation derived from
the First Disposal Portfolio, including any royalties and other compensation
received by Hipgnosis Songs Fund, from 1 January 2023 (the "RTI Date"),
whenever they are received. This amount from 1 January 2023 to date is
approximately $15.3 million.

The Company will retain responsibility for the payment of any bonus, earn-out
or other contingent payments under the original acquisition agreements in
respect of the First Disposal Portfolio, up to a cap of $30 million. This
liability is currently anticipated to be approximately $5.5 million.

The First Disposal is conditional upon various conditions, including the
satisfaction (or waiver, where applicable) of the following:

·    The passing of the Asset Sale Resolution approving the disposal of the
First Disposal to Hipgnosis Songs Capital by independent shareholders at the
Extraordinary General Meeting;

·    The passing of the scheduled Continuation Resolution by shareholders
at the 2023 AGM;

·    Any applicable waiting period under the Hart-Scott Rodino Antitrust
Improvements Act of 1976 (as amended) having expired or terminated;

·    No event or change having occurred that would reasonably be expected
to have a material adverse effect on the revenues to be received under the
First Disposal Portfolio taken as a whole (subject to certain carve outs
customary to a condition of this nature);

·    Representations and warranties given by the sellers and the Company
and Hipgnosis Songs Capital being true and correct (subject to certain
materiality qualifiers);

·    No governmental body having enacted or issued any law or order which
prohibits or renders the First Disposal illegal and no action having been
commenced by a governmental body that seeks to suspend or prohibit the First
Disposal;

·    A representation and warranties insurance policy being in full force
and effect and the Company having paid all applicable fees and premiums
associated with such policy;

·    The Board of Hipgnosis Songs Fund not terminating the transaction
following receipt of a Superior Proposal (as defined below); and

·    Certain other matters including the perfection of title to certain of
the First Disposal Assets, the release of encumbrances over the First Disposal
Assets and the provision of certain further information from the Company to
Hipgnosis Songs Capital.

The sale and purchase agreement contains certain warranties and indemnities
given by the Company. Hipgnosis Songs Capital has procured, at the cost of the
Company, a representation and warranty insurance policy and will use
reasonable endeavours to claim against such insurance policy prior to making a
claim against the Company in respect of warranties and indemnities covered by
the insurance policy.

In addition, the Company has given an indemnity in respect of any reduction in
the value of the rights transferred in the event that certain companies which
have been dissolved are not restored to the register of companies in order
that they can transfer certain rights.

The Company has the right, for a period of 40 days from the date of this
announcement (the "Go-Shop Period"), to solicit alternative transactions in
relation to the First Disposal Portfolio from third parties (the "Go-Shop").
If the Company receives and settles the transaction documents in respect of a
Superior Proposal (as defined below) during the Go-Shop Period, and not to do
so would be inconsistent with the Board's fiduciary and statutory duties
(having consulted with its legal and financial advisers), the Board may
withdraw its recommendation to Shareholders of the First Disposal and
terminate the Agreement, provided that (i) Hipgnosis Songs Capital has the
right, within 5 Business Days of notification of a Superior Proposal to
Hipgnosis Songs Capital, to match the Superior Proposal; and (ii) the Company
will pay to Hipgnosis Songs Capital a termination fee of $6.6 million (the
"Termination Fee"). If Hipgnosis Songs Capital matches the Superior Proposal,
such transaction will be final and binding and the Company will not be
permitted to have any further discussions or negotiations relating to a
Superior Proposal or other alternative transaction with any person.

For the purposes of the Go-Shop, a "Superior Proposal" is a bona fide written
alternative transaction proposal from an unaffiliated third party in respect
of the First Disposal Assets (or a subset of the First Disposal Assets) which:
(i) if completed would result in higher aggregate cash net proceeds payable to
the Company as a whole compared to the First Disposal; and (ii) is on terms
that the Board determines in good faith (after consultation with the Company's
legal counsel and financial advisers) to be reasonably likely to be
consummated in accordance with its terms. For the purposes of the definition
of Superior Proposal, the aggregate cash net proceeds payable to the Company
pursuant to the First Disposal or an alternative transaction shall be
determined in accordance with the following principles:

·    deducting any advisory fees and other third party costs (including
taxes) payable by the Company and its affiliates;

·    deducting the Termination Fee payable to Hipgnosis Songs Capital from
any alternative proposal;

·    any amounts of deferred consideration (other than holdback) not
payable at closing shall be subject to a discount rate at 12.5% IRR from
closing to the date on which such consideration is payable;

·    any amounts in respect of holdback in relation to an alternative
transaction shall be subject to a discount to such amount as is reasonably
probable to actually be paid to the Company, as determined by the Board acting
reasonably and in good faith, and in relation to both the First Disposal and
an alternative transaction, a discount at a rate of 12.5% IRR from closing to
the date on which such consideration is payable (as determined by the Board
acting reasonably) shall be applied, provided that the holdback in respect of
the First Disposal shall not be subject to a discount for probability;

·    any other contingent consideration in an alternative transaction shall
be subject to a discount to such amount as is reasonably probable to actually
be paid to the Company, as determined by the Board acting reasonably and in
good faith, and further to a discount at a rate of 12.5% IRR from closing to
the date on which such consideration is payable (which date will be as is
agreed in the alternate proposal, absent which it will be as determined by the
Board acting reasonably);

·    the revenue to be accounted for to the purchaser subsequent to the
date on which ownership of all royalties and other compensation derived from
the First Disposal Portfolio is assigned (being, in respect of the First
Disposal, the RTI Date) shall be deducted;

·    the Company's liabilities to pay contingent bonuses (being, in
relation to the First Disposal, an amount estimated to be $5.5 million) shall
be deducted; and

·    no deduction shall be made for any right to hold back any
consideration at closing in respect of certain encumbered assets.

Save for the Go-Shop, the Company has agreed not to initiate, assist, solicit,
facilitate or encourage the submission of any inquiries regarding or the
making of any proposal or offer that constitutes, or could reasonably be
expected to lead to, any type of transaction relating to the Company or its
securities or any of the First Disposal Portfolio, or any other assets of the
Company solely to the extent that such a transaction in relation to such other
assets of the Company could reasonably be expected to require the Company to
abandon or terminate, or prejudice its ability to, consummate the First
Disposal or breach the agreements relating to the First Disposal. The Company
will not be required to comply with such restrictions in relation to a
proposal in relation to an offer for the entire issued share capital of the
Company that was not solicited, initiated or encouraged by or on behalf of
Company, to the extent that compliance would otherwise be inconsistent with
the fiduciary duties of the Board (a "Takeover Proposal"). If the Board
determines in response to a Takeover Proposal or otherwise, that not to change
its recommendation that shareholders vote in favour of the resolutions to
approve the First Disposal at the General Meeting would be inconsistent with
the Board's fiduciary duties (having consulted with its legal and financial
advisers) and shareholders subsequently do not approve the First Disposal, the
Company will be required to pay the Termination Fee to Hipgnosis Songs
Capital.

The Agreement may be terminated (subject to payment of the Termination Fee,
where relevant) by:

·    mutual written consent of Hipgnosis Songs Capital and the Company;

·    either Hipgnosis Songs Capital or the Company if an order from a
governmental body makes consummation of the First Disposal illegal or
otherwise prohibited;

·    either Hipgnosis Songs Capital or the Company if the resolution to
approve the First Disposal at the Extraordinary General Meeting or the
Continuation Resolution is put to shareholders and not passed;

·    by the Company in the circumstances described above where a Superior
Proposal has been received; and

·    either Hipgnosis Songs Capital or the Company if the First Disposal
has not been consummated within 180 days of the date of the Agreement.

In the event a Superior Proposal is received during the Go-Shop period and
Hipgnosis Songs Capital exercises its matching right, the Board expects it
will be necessary to adjourn the Extraordinary General Meeting and 2023 AGM to
a later date to allow for the posting of a further shareholder circular
setting out the amendments to the terms of the First Disposal. Assuming it is
not terminated in favour of a Superior Proposal, the First Disposal is
expected to complete approximately 13 business days following satisfaction or
waiver of all conditions, which is expected to be shortly after the date of
the EGM and the 2023 AGM.

Related Party Transaction

Funds managed by Blackstone hold the majority of interests in both Hipgnosis
Songs Capital and the Investment Adviser. In addition, the Investment Adviser
acts as investment adviser to both the Company and Hipgnosis Songs Capital. In
light of the Investment Adviser and Hipgnosis Songs Capital having the same
majority owners, Hipgnosis Songs Capital is a related party of the Company for
the purposes of the Listing Rules. The First Disposal is therefore a related
party transaction under the Listing Rules and is conditional upon the approval
of independent shareholders at the Extraordinary General Meeting.

The Company intends to publish a circular which will be posted to Company
shareholders no later than 27 September 2023 which will include the notice
convening the Extraordinary General Meeting to consider and, if thought fit,
to pass, the Asset Sale Resolution. The circular will also contain a notice
convening the 2023 AGM for the same date.

In addition, the Company notes that Mr Mercuriadis and certain employees of
Hipgnosis Song Management have disclosed to the Board that they hold a
minority interest in the share capital of Hipgnosis Songs Capital.

Hipgnosis Songs Capital is the trading name for all entities within the
partnership between Hipgnosis Song Management and fund managed and advised by
Blackstone.

Recommendation in respect of the First Disposal

The Board considers the proposals described in this announcement, the passing
of the Asset Sale Resolution at the Extraordinary General Meeting and the
passing of the Continuation Resolution and each of the other resolutions to be
proposed at the 2023 AGM to be in the best interests of the Company and its
shareholders taken as a whole. Accordingly, the Board intends to unanimously
recommend that shareholders vote in favour of the Asset Sale Resolution to be
proposed at the Extraordinary General Meeting and each of the resolutions to
be proposed at the 2023 AGM.

Information on the Second Disposal

Following a competitive process, the Board has agreed in principle, subject to
completion of legal documentation and the consent of the Company's lending
banks, to sell a portfolio of non-core songs for a consideration of
approximately $25 million.

The Second Disposal Portfolio songs were acquired as part of Kobalt Fund One
and their eventual sale was part of the Company's acquisition strategy, as
they were considered non-core, as the Company does not have perpetual
ownership rights or the songs require ongoing accounting and reporting
obligations that take up significant bandwidth which can be better focused on
active Song Management.

Information on the Company's continuing portfolio

Following the First Disposal, the continuing portfolio will comprise 117
Catalogues with an older average vintage of 2002 (assessed as of 31 March
2023) and will have an increased concentration of culturally important and
successful songs, with the Company retaining an interest in 47 of Rolling
Stone's 500 Greatest Songs of All Time (existing portfolio has 52 of these
songs) and 85 Spotify Billions Club (existing portfolio has 106/473).

 

 KPI                       Current Portfolio                                                Portfolio post First Disposal
 Number of Catalogues      146                                                              117
 Average vintage           2003                                                             2002
 Quality KPIs              106 of 473 of Spotify's Billions Club (as at 12 September 2023)  85 of 473 of Spotify's Billions Club

                           52 of Rolling Stone's The 500 Greatest Songs                     47 of Rolling Stone's The 500 Greatest Songs

                           13 of YouTube's 30 Most Viewed Music Videos                      8 of YouTube's 30 Most Viewed Music Videos
 Rights type               Publishing: 86%                                                  Publishing: 86%

                           Recording: 14%                                                   Recording: 14%
 Fair value                $2.80 billion                                                    $2.27 billion
 2022 PFAR                 $130.2 million                                                   $106.1 million
 2022 PFAR by income type  Streaming: 54%                                                   Streaming: 51%

                           Synchronisation: 8%                                              Synchronisation: 9%

                           Performance: 31%                                                 Performance: 30%

                           Other: 7%                                                        Other: 10%

 

Following both the First Disposal and Second Disposal, the Company's annual
income per song will increase by over 75% from $1,990 to $3,500. This smaller
focused portfolio of higher earning songs can be more effectively actively
managed to deliver the strong synch and revenue growth the Company's recent
financial results have proven possible.

Use of Proceeds

The combined net proceeds of the First Disposal and Second Disposal will be
used to establish a share buy back programme (subject to shareholder approval
at the 2023 AGM), reduce drawings under the RCF and to enhance financial
flexibility as follows:

Share buy back programme

Following the completion of the First Disposal, the Board intends to establish
an on-market share buy back programme under which the Company may apply up to
$180 million to repurchase the Company's Ordinary Shares in issue. No maximum
price payable for each Ordinary Share purchased under the share buy back
programme has been determined, however all purchases will be subject to the
maximum price permitted to be paid pursuant to Listing Rule 12.4.1 and within
the limits set out in the share buy back authority to be proposed at the 2023
AGM.

Insofar as the Company's shares continue to trade materially below the
Company's fundamental asset value, share buy backs enable the Company to
invest further into the remaining Portfolio at a material discount to its
fundamental asset value.

The share buy back programme will require the customary approval of
shareholders at the Company's forthcoming AGM, which would authorise the
Company to repurchase up to 14.99% of its issued share capital. Should this
authority be fully utilised, the Board would seek shareholder approval to
renew this authority for further share buy backs should the Board believe they
are in the best interests of shareholders at that time.

Reduce indebtedness

The Company intends to use part of the net proceeds of the First Disposal and
Second Disposal to repay $250 million of amounts drawn under the Company's RCF
with the expectation of reducing the Company's net indebtedness to below 20%
of proforma Operative NAV.

Given the increase in interest rates, the cost of the Company's debt has risen
significantly since initial draw down, reducing the financial benefits of
leverage to the Company's revenues. As a result, the Board believes that it is
in the best interests of shareholders to reduce leverage in order to improve
security over the target dividend.

Financial flexibility

The Company intends to use any remaining proceeds to enhance general financial
flexibility.

Amendment to Investment Advisory Agreement

Subject to, and immediately following completion of the First Disposal to
Hipgnosis Songs Capital, the terms of the Investment Advisory Agreement will
be amended such that the calculation of the annual advisory fee payable by the
Company to the Investment Adviser will be amended to include additional lower
tiers. Following the amendment, the advisory fee will be calculated as
follows:

i.    1 per cent. per annum of the Average Market Capitalisation up to, and
including, £250 million, which is unchanged;

ii.   0.90 per cent. per annum of the Average Market Capitalisation in excess
of £250 million and up to, and including, £500 million, which is unchanged;

iii.  0.80 per cent. per annum of the Average Market Capitalisation in excess
of £500 million and up to, and including, £750 million, which is unchanged;

iv.   0.70 per cent. per annum of the Average Market Capitalisation in excess
of £750 million and up to, and including, £1 billion, which is new; and

v.    0.60 per cent. per annum of the Average Market Capitalisation in
excess of £1 billion, which is new.

Where Average Market Capitalisation means, in relation to each month during
the relevant Accounting Period where the Advisory Fee is payable, ("A"
multiplied by "B") where:

"A" is the average of the middle market quotations of the Ordinary Shares for
the five day period ending on the last Business Day of the relevant month in
that Accounting Period (adjusted as appropriate to exclude any dividend where
the Ordinary Shares are quoted ex such dividend at any time during that five
day period);

"B" is weighted average of the number of Ordinary Shares in issue (excluding
any Shares held in treasury) at the end of each day during the relevant month
in that Accounting Period.

As at close of trading on 13 September 2023, being the last trading day prior
to the date of this announcement, the Company's current market capitalisation
was approximately £1,125 million, representing a 40% discount to the
Operative NAV of £1,873 million as at 31 March 2023. For illustrative
purposes, if the Company's share price were to increase to the level of the
Operative NAV, this proposal would amount to an annualised saving of £2
million.

All other terms of the Investment Advisory Agreement will remain unchanged.

Recommendation

The Board considers the proposals described in this announcement and the
passing of the Asset Sale Resolution to be proposed at the Extraordinary
General Meeting and the passing of the Continuation Resolution and each of the
other resolutions to be proposed at the 2023 AGM to be in the best interests
of the Company and its shareholders taken as a whole. Accordingly, the Board
intends to recommend unanimously that shareholders vote in favour of the these
resolutions in due course.

The person responsible for making this notification is Andrew Sutch, Chairman
of Hipgnosis Songs Fund Limited.

Notes to Editors

About Hipgnosis Songs Fund:

Hipgnosis Songs Fund, 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. In March 2020 the Company became a constituent of the FTSE 250
Index. The Company is recognised as an investment trust under applicable HMRC
regulations.

About Hipgnosis Song Management Limited:

Hipgnosis Song Management Limited is the Investment Adviser for Hipgnosis
Songs Fund Ltd (SONG) and Hipgnosis Songs Capital. Hipgnosis Song Management
was founded by Merck Mercuriadis, former manager of globally successful
recording artists, such as Elton John, Guns N' Roses, Morrissey, Iron Maiden
and Beyoncé, and hit songwriters such as Diane Warren, Justin Tranter and
The-Dream. The Investment Adviser has assembled an Advisory Board of highly
successful music industry experts which include award winning members of the
artist, songwriter, publishing, legal, financial, recorded music and music
management communities, all with in-depth knowledge of music publishing.
Members of Hipgnosis Song Management Ltd Advisory Board include Nile Rodgers,
The-Dream, Giorgio Tuinfort, Starrah, David A. Stewart, Poo Bear, Bill
Leibowitz, Ian Montone and Rodney Jerkins.

About Blackstone:

Blackstone is the world's largest alternative asset manager. We seek to create
positive economic impact and long-term value for our investors, the companies
we invest in, and the communities in which we work. We do this by using
extraordinary people and flexible capital to help companies solve problems.
Our $1 trillion in assets under management include investment vehicles focused
on private equity, real estate, public debt and equity, infrastructure, life
sciences, growth equity, opportunistic, non-investment grade credit, real
assets and secondary funds, all on a global basis. Further information is
available at www.blackstone.com. Follow @blackstone on LinkedIn, Twitter
and Instagram.

Important information relating to financial advisers

J.P. Morgan Securities PLC, which conducts its UK investment banking business
as J.P. Morgan Cazenove ("J.P. Morgan Cazenove"), is authorised in the United
Kingdom by the Prudential Regulation Authority (the "PRA") and regulated by
the Financial Conduct Authority ("FCA") and PRA. J.P. Morgan Cazenove is
acting as sponsor and financial adviser exclusively for the Company and no one
else in connection with the First Disposal and the matters set out in this
announcement and will not regard any other person as its client in relation to
the First Disposal and will not be responsible to anyone other than the
Company for providing the protections afforded to clients of J.P. Morgan
Cazenove or its affiliates, or for providing advice in relation to the First
Disposal or any other matters referred to in this announcement. Apart from the
responsibilities and liabilities, if any, which may be imposed on J.P. Morgan
Cazenove by FSMA or the regulatory regime established thereunder or under the
regulatory regime of any jurisdiction where the exclusion of liability under
the relevant regulatory regime would be illegal, void or unenforceable, J.P.
Morgan Cazenove and any person affiliated with it assumes no responsibility
whatsoever for and makes no representation or warranty express or implied, in
relation to the contents of this announcement, including its accuracy,
completeness or verification or for any other statement made or purported to
be made by it, or on its behalf and nothing contained in this announcement is,
or shall be, relied upon as a promise or representation in this respect
whether as to the past, present or future, in connection with the Company, or
the First Disposal. J.P. Morgan Cazenove and its respective subsidiaries,
branches and affiliates accordingly disclaims to the fullest extent permitted
by law all and any duty, responsibility and liability whether arising in tort,
contract or otherwise (save as referred to above) which it might otherwise be
found to have in respect of this announcement or any such statement or
otherwise. Any reproduction or distribution of this announcement, in whole or
in part, and any disclosure of its contents or use of any information
contained in this announcement for any purpose other than considering the
terms of the Transaction is prohibited.

Goldman Sachs International, which is authorised by the Prudential Regulation
Authority and regulated by the Financial Conduct Authority and the Prudential
Regulation Authority in the United Kingdom, is acting exclusively for
Blackstone and no one else in connection with the matters referred to in this
Announcement and will not be responsible to anyone other than Blackstone for
providing the protections afforded to clients of Goldman Sachs International
or for providing advice in connection with the matters referred to in this
Announcement.

 

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