Hipgnosis: continuation vote should be turned into protest

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Barry Manilow once sang “you know I can’t smile without you”. Shareholders in London-listed music rights owner, Hipgnosis Songs Fund, would be justified for wondering if they will ever smile again.

The UK investment trust’s axing of its interim dividend sent its already depressed share price to an all-time low on Monday. The board’s credibility had already been in question, given the steep discount at which its shares trade to its net asset value. More recently, a proposed $440mn sale of a chunk of its portfolio to a Blackstone-owned sister fund turned up the heat.

Shareholders are due to vote on that deal next week as well as whether the fund should continue for another five years. Investors should use the continuation vote as a protest. Chair Andrew Sutch had already agreed to step down by the fund’s 2024 annual meeting at the latest. The search for a dependable replacement must accelerate.

Hipgnosis’s latest woes come after its independent valuer, Citrin Cooperman, told the board it should now expect fewer payments for its US song catalogue that are owed for 2018-2022. There are questions to answer about how and why in March Hipgnosis and Citrin had expected retroactive payments amounting to $21.7mn. On Monday, that estimate was slashed to $9.9mn.

Lex has previously expressed concerns about the small world of music rights valuation, which boasts just a handful of independent players. Citrin did not adjust its discount rate in 2022 even as interest rates were rising. Hipgnosis last year hired an additional independent valuer, Kroll Advisory, suggesting the board had questions of its own.

The scrapping of the interim dividend was required to ensure Hipgnosis continued to comply with the covenants on its $700 million revolving credit facility. This might persuade some shareholders who were wavering over the $440mn asset sale, suggested Stifel analyst Sachin Saggar. Deleveraging is now a greater concern than previously thought.

Hipgnosis’s shares now trade at 66.5p, a 58 per cent discount to its net asset value per share as of the end of March. If the continuation vote fails, Hipgnosis’s board will be forced to rapidly draw up proposals for how to rebuild, as well as potentially wind-down, the company. They should not wait until the vote outcome to start.