The shares of one of the largest music rights owners are at an all-time high, the latest indication that gold rush for back catalogues is over.
Hipgnosis’ stock fell after the company said that its accountants have reduced their expectation of what it will earn through a retroactive agreement for streaming rights. The amount was cut from $21.7m down to $9.9m.
The company stated that the $11.8m shortfall (£9.7m), meant that it would be in breach of its debt covenants, if it paid out the 1.3p dividend per share as originally scheduled.
It had to cancel the recently announced payout.
Following the announcement, Hipgnosis shares fell 10pc to a new record low.
Since the peak of its value two years ago, when music catalogues were a hot investment, Hipgnosis’s stock has lost nearly half of its value. The shares have dropped as interest rates increased and questions have been raised about the value of the company’s extensive catalog.
The cancellation of the dividend comes just before a critical vote next week on the future of the company, when shareholders vote to determine if it should potentially be wound down.
Investors including the Church of England are expected to vote on whether or not to approve the sale of Hipgnosis music rights in order to raise money to pay off debt.
Merck Mercuriadis , a former music director, who worked with Guns n’ Roses, Beyonce, and Sir Elton John founded Hipgnosis in 2018. Nile Rodgers is one of the advisers.
It has accumulated a portfolio that it values at $2.8bn, in a wager on the value of music by artists such as the Red Hot Chili Peppers or Mark Ronson.
Mr Mercuriadis pioneered the idea that music rights could be an alternative asset class in which investors can invest their money. He argues that royalties generated by music streaming make back catalogues a good investment.
The boom has been questioned by the rising interest rate.
The higher borrowing rates have impacted valuations and slowed down dealmaking. Some artists have also withdrawn from plans to sell their back catalogues.
Sir Rod Stewart cancelled discussions in May to sell his back catalog Hipgnosis, saying that “This wasn’t the right company to handle my song catalogue, career or legacy.”
Analysts have also questioned Hipgnosis’s portfolio. They claim that the projections of future royalties were in some cases overly optimistic.
Hipgnosis’s assets are now worth only £800m, less than half the current value.
A ruling by the US Copyright Royalty Board from last year boosted the company. It said that streamers like Spotify and Apple Music should pay millions of dollars in retroactive payments to rights holders. Companies must pay up to 15,1pc of revenues from 2018-2022 to artists, as well as make large back payments.
Hipgnosis, however, said that on Monday an independent valuer has more than halved the forecasts of how much they expect to earn from this industry ruling.
Next Thursday, the company will face two important votes. At its annual meeting on Thursday, shareholders will vote on the sale of $440m (£362m), which includes songs by the Kaiser Chiefs, and rapper Nelly to Hipgnosis’s sister fund that is privately held. This fund is backed US investment giant Blackstone.
Investors also have the option to reject “continuation”, meaning that management would be forced to submit restructuring proposals.
Investors say that the company could liquidate its assets if a revolt occurs, but some have said that it could simply be a matter of bringing in new management.
Asset Value Investors (which owns a 5pc share in Hipgnosis) urged Hipgnosis shareholders on Monday to reject the continuation of the company, and called for a board reshuffle.
Sachin Saggar of Stifel said that scrapping the dividend would likely boost support for an investor revolt next week. “This announcement is unexpected and changes the dynamics around the vote.”