Hipgnosis results delay sheds light on frictions between manager and revamped board

Today (19 December), the board expressed doubts over the asset valuations provided by independent valuer Citrin Cooperman, noting that they were “materially higher” than the valuation implied by proposed and recent transactions in the sector. 

Therefore, the board sought advice from its investment adviser, Hipgnosis Song Management (HSM), on their opinion on the provided valuation. 

A “heavily caveated” opinion was “eventually” provided by HSM, such that the board “has concerns as to the valuation” of the assets in the interim results, which are now expected to be published by 31 December 2023. 

Hipgnosis Songs delays publication of half-year results over valuation concerns

In a subsequent statement, HSM said it had “fulfilled its duties to the company with respect to both the independent valuation and preparation of the interim results in a timely and efficient manner” and that it would “continue to work in a constructive manner”.

According to Investec analysts Ben Newell and Alan Brierley, the fact that the manager decided it was necessary to issue a press release clearly suggests there was “friction” between them and the board. 

However, they noted that given the “tight” timeframe to publish its interim results, the “key question” is what the board can do in the next few days to get comfortable with the portfolio valuation, with the possibility of share suspension if the interims are not published in time.

Stifel analyst Sachin Saggar said that in some ways, the delay in publishing the results on concerns over valuations seemed “about two years too late”, noting that it has been “obvious for some time” that the NAV was incorrect.

“The manager is potentially tying themselves in knots over their position,” he said. “You cannot sell non-core songs at -14% below the current valuation and provide a bid for c.20% of the portfolio at a -20% plus discount to the valuation provided by Citrin Cooperman and not say that you think their process is ‘bogus’.”

Failed continuation vote leaves Hipgnosis Songs manager in a ‘do or die’ position

Saggar noted that for Hipgnosis Songs Management to continue managing the portfolio, it would have been more beneficial to “amicably work” with a board that has been in place for only a month. “Stating the obvious would have been a good start,” he said. 

The Hipgnosis Songs board has been refreshed in recent months, following the ousting of former chair Andrew Sutch at the trust’s annual general meeting held in October and the resignation of non-executive directors Andrew Wilkinson and Paul Burger the evening before.

In early November, Robert Naylor, the former chair of the fellow music royalties trust Round Hill Music, was appointed chair and Francis Keeling named non-executive director, while industry veteran Christopher Mills joined the board last week as a non-executive director.

Saggar noted that the manager, given it has been active in purchasing catalogues, “cannot hide” behind an independent valuation agent if it has already admitted it does not believe the valuation is correct, through its own attempt to purchase a substantial part of the portfolio in September.

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“The crux of this issue is likely that the manager is trying to ensure that they protect their call option to purchase the portfolio,” he said. “Admitting to errors that opens the door to terminating the investment advisory contract ‘for cause’ likely lapses this option.”

Invesco’s Brierley and Newell also pointed to the “inherent conflict” created by HSM’s call option over the portfolio granted under the investment management agreement (IMA), and specifically what fair value means under this eventuality.

On termination of the IMA, HSM is entitled to acquire the trust’s portfolio at a ‘fair’ value for a six-month period following the termination date through a “call option” clause. 

Numis analyst Ewan Lovett-Turner said there is growing evidence to potentially allow the management contract to be terminated “without onerous terms”, such as the call option, if it is viewed that HSM has not met its service standard, which he said could be a “legal minefield”.