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Music rights are not straightforward to price. Combine record sales, radio play, tour income, streaming and media use, and songs can make millions of dollars. But changes in taste and the way audiences listen to music can alter valuations.
Since 2018 the UK’s Hipgnosis Songs Fund has spent billions of dollars buying up rights to work by artists including rock band the Red Hot Chili Peppers and rapper 50 Cent.
Calculating what those songs are worth now is complicated. Following a crash in the share price, the new board, led by Rob Naylor, former chair of Hipgnosis peer Round Hill, worries that the valuation provided by independent consultants at Citrin Cooperman is too high.
Delayed results settled on a net asset value of 136p per share, or £1.6bn, at the end of last year. Hipgnosis’s current share price of 68p suggests investors believe that figure is still inflated.
Music rights valuations must take into account artist recognition plus owner control. The extent of this split at Hipgnosis is unknown, although the company insists that a high proportion of the music can be fully commercialised. The board has appointed specialist bankers from Shot Tower Capital to find out.
Like Elvis, cash is king. Citrin Cooperman’s official net asset value discounts the money a song is expected to make and works out a net present valuation. But that does not take into account what investors might be willing to pay.
Dealmakers prefer to use current cash flows — net publisher share in industry parlance. This calculates the sum a rights holder receives after deductions such as an artist’s cut of revenues. Recent transactions have been done at multiples of around 17 times NPS. The sale of David Bowie’s portfolio in 2022 applied a 20 times multiple.
Why, then, did Hipgnosis shareholders last year vote against the sale of a chunk of its portfolio for $440mn — described as an 18.3 times NPS multiple?
Up to date revenue numbers were not used for the calculation, says Stifel’s Sachin Saggar. Growth has picked up, aided by streaming and gigs. Taking that into account the real multiple for the deal is probably closer to 15 times. Shareholders appear to have made the right choice batting it away.
At a NPS of 17 times, Stifel estimates that the fund’s NAV is closer to 100p per share. That falls short of what the new board claims but it would close the share price discount from a half to a third.
The board is hoping to attract new prospective bidders for its catalogue. Given past questionable valuations, they will have to carry out careful due diligence.
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