The buyout shop owned by Steve Schwarzman has mastered the cap rate technique. Has the song been perfected, though? Blackstone increased its offer by one cent on Monday to purchase Hipgnosis Songs Fund, the owner of music royalties behind 50 Cent and Shakira that is listed on the UK market. The music industry has consistent, predictable financial flows linked to catalogs, similar to owning a home or business. However, those assets' yields appear modest in comparison to interest rates. At $1.6 billion, Blackstone cannot miss any more notes.
A complex deal to split it apart was voted down by shareholders late last year, which sparked the start of an auction process. A third-party investment firm, Shot Tower, conducted a strategic evaluation and discovered that the fund had overpaid for its catalogs and inflated its revenue and EBITDA. After a bidding war, Blackstone ultimately outbid Apollo Global Management-backed Concord Chorus in May.
Although Blackstone is relatively new to this industry, it has a strong history to draw from. Similar to the rent that landlords receive, music royalties are also contingent on the duration of the lease and the building's classification. Some have steady and regular cash flow, such as older catalogs. The revival of Journey's "Separate Ways" in Netflix's "Stranger Things" could be compared to Blackstone's ownership of Stuyvesant Town/Peter Cooper Village in New York City. Less-tested, more recent tunes are like short-term office rentals. There is greater volatility in cash flows. A portion of another music company's royalty stream is owned by passive catalogs. It's comparable to being paid to oversee a building.
Similar to real estate, Hipgnosis' value decreased as interest rates rose beginning in early 2023. Before bids emerged, shares fell by half from their peak in 2021 to March. This dynamic illustrates how prices and yields are related. The relative cash flow-to-asset value appears better at low rates than it does at high rates. Consider Hipgnosis's collection. According to investment bank Shot Tower, its repertoire is currently worth $1.9 billion, including royalties of $122 million, meaning it has a yield of about 6%. That's not too bad, considering the interest rates now. Hipgnosis, however, appeared far better a few years ago, when rates were somewhat above zero. It was before the company's song-buying binge for lower-grossing songs.
Blackstone might give the songs a second listen and try to get them into a new TV series or improve their social media monetization. Private equity firms are, after all, focused on improving asset quality. Additionally, the company is well-known for paying $39 billion to purchase real estate tycoon Sam Zell's office property REIT in 2007, just before the global financial crisis, in order for it to detect value. However, the pennies it added to its offer price on Monday demonstrate the essential restraint. Any further octaves would throw the deal off too far.
