Hipgnosis/Pink Floyd: Blackstone deal may leave trust uncomfortably glum

“Grab that cash . . . and make a stash.” Almost 50 years on from the 1973 hit “Money”, Pink Floyd are still living up to their lyrics. US private equity group Blackstone is vying to buy the UK band’s back catalogue in a deal that could be worth almost half a billion dollars.

The deal would put the spotlight on Blackstone and majority-controlled business Hipgnosis Song Management, run by Elton John’s former manager Merck Mercuriadis. But UK-listed investment trust Hipgnosis Songs Fund, set up by Mercuriadis in 2018, might not even participate.

The trust’s debt was 25.4 per cent of net asset value (NAV) at the end of March, not far below the 30 per cent cap. And it can hardly repeat last summer’s cash call when it raised £150mn.

That is because a yawning discount has opened up. The shares have fallen 9 per cent since June 2021, while the NAV has risen 30 per cent to 154.76p per share in the 13 months to July. This is partly explained by the weakness of sterling, down almost a fifth against the dollar. It was also driven by a 9.5 per cent uplift in the value of the portfolio to $2.7bn for the year to March.

But the extent of the discount suggests scepticism about the NAV. It is unclear why the portfolio should be valued at 23 times revenues, compared with 19 times for its peer Round Hill, using Stifel numbers.

The company says one positive factor is the number of newer-vintage song catalogues reaching the end of their “decay cycle” ahead of expectations. Investors, though, may be unwilling to cheer a drop-off in revenues from newish songs of almost a quarter over two years.

Adding to the unease is an independent valuer’s insistence that an 8.5 per cent discount rate does not need to be increased as interest rates go up. Hipgnosis set out to rewrite the rules of the song business. But taking an unorthodox approach to valuation will make it harder to establish music rights as an asset class.