By Jack Lee, Heather Leung, and Jeremia Bryan Darmadi (HKUST), Nikitas Kitsantas, Carlotta Nardello (ESADE)
Photo: Priscilla Du Preez (Unsplash)
Overview of the deal
Acquirer: Hipgnosis Songs Capital ICAV
Target: Justin Timberlake
Total Transaction Size: $100 million
Closed date: May 26, 2022
Target advisors: Rick Yorn, Josh Dembling at LBI Entertainment and Johnny Wright at Wright Entertainment Group (Financial), David Lande and Mitch Tenzer at Ziffren Brittenham LLP (Legal)
On May 26, 2022 Justin Timberlake sold his song catalogue to Hipgnosis which includes his hit songs from the last 20 years such as “Can’t Stop the Feeling”, nominated at the 89th Academy Awards. Hipgnosis states that through this deal they acquired “100% of all of Timberlake’s copyright, ownership and financial interests of the Writer and Publisher’s Share of Public Performance income, and the catalogue of musical compositions written by Justin Timberlake”.
The acquisition has been made on behalf of Hipgnosis Songs Capital ICAV, backed by Blackstone, which is a different entity from Hipgnosis Songs Fund, currently listed in the UK market (Hipgnosis Songs Capital is a $1 billion joint venture between Blackstone and UK’s Hipgnosis Songs Management). The deal’s estimated value is of over $100 million and it comprises over 200 songs and the worldwide administration rights to future compositions in terms with Universal Music Publishing Group’s administration rights set to expire in 2025.
This deal comes just one year after the initial founding of Hipgnosis Songs Capital with $1bn from Blackstone to create this private vehicle, aimed to acquire artists’ music rights and catalogues. Timberlake’s deal marks the third acquisition for Hipgnosis Songs Capital in 2022, after growing its portfolio with Leonard Cohen’s songwriting catalogue and 80% of Kenny Chesney’s royalties.
“I am excited to be partnering with Merck (CEO of Hipgnosis) and Hipgnosis – he values artists and their creative work and has always been a strong supporter of songwriters and storytelling.” - Justin Timberlake
Company Details (Acquirer - Hipgnosis Songs Fund)
Hipgnosis Songs Fund is the first UK investment company offering investors a pure-play exposure to songs and associated musical intellectual property rights. The company focus is to build a diversiﬁed portfolio, acquiring catalogues that are built around proven hit songs of cultural importance by some of the most talented and important songwriters globally.
Founded in 2018, headquartered in Guernsey, UK
CEO: Merck Mercuriadis
Number of employees: ~100
Market Cap: $1.3bn (as of 20/04/2023)
LTM Revenue: $172.6mn
LTM EBITDA: $136.9mn
LTM EV/Revenue: 10.4x
LTM EV/EBITDA: 13.1x
Recent Transactions: $200mn acquisition of Justin Bieber’s 290 music catalogue rights (Jan 2023); $150mn acquisition of Neil Young’s song catalogue; $323mn acquisition of Kobalt Music Copyrights Fund 1 (Nov 2020)
Company Details (Target - Justin Timberlake)
Justin Timberlake is a prominent US singer, songwriter and actor, who has sold over 88 million records. He rose to fame with the boy band NSYNC in 1995, and in the early 2000s he focused on acting and continued his music career as a soloist. He is the founder of Tennman Records and William Rast Retailm, part-owner of the Memphis Grizzlies and partner in Sauza 901 Tequila. Before the deal with Higpnosis, his net-worth amounted to $250 million.
Active since 1992, resident in United States of America
Awards: 10 Grammy Awards, 4 Emmy Awards, 7 American Music Awards, 3 Brit Awards, 9 Billboard Music Awards, 11 MTV Video Music Awards and 29 ASCAP Awards
Music groups: NSYNC (1995 – 2002), Jawbreakers (Since 2005), Bravo All Stars (1998 – 1998), The Y's
Projections and Assumptions
For Justin Timberlake, the deal means that the artist will no longer receive royalty revenues from his work, whether that would be from streaming or usage by media sources. According to Forbes, Timberlake used to receive $45 million in annual income from streaming platforms such as Spotify ($20 million) and Apple Music ($15 million).
Nevertheless due to the pandemic, like many artists, Timberlake was unable to go on tour to perform at live concerts, missing out on a crucial revenue stream (for example in 2019, Timberlake earned $23.7 million for live shows in the US) for two years. Consequently, the artist joined many others who instead turned to selling their older works, providing some short-term relief.
For Hipgnosis, by acquiring complete rights to manage Timberlake’s catalogue of 200 songs, it will receive royalties whenever a song is streamed or played in a movie or advertisement. Therefore, it is undeniable that the acquisition will provide a strong future revenue stream given Timberlake’s current popularity. Moreover, at the time, the acquisition for Hipgnosis also represented a wider competition against other funds in the industry who were investing in this asset class. For example, Universal Music Group in 2021 bought Bob Dylan 600-song catalogue for $300 million and in 2022 acquired Sting’s song catalogue for $250 million, whilst Warner Music Group acquired David Bowie’s music catalogue for $250 million. Therefore, it was crucial for Hipgnosis not to miss out on acquiring a key catalogue from such a well-established artist.
For Timberlake, the deal secures an immediate payout of $100 million, rather than awaiting potential payout in the future. This income is on top of Timberlake's incredible success with the NSYNC boy band and solo career, with more than 70 million and 88 million album copies having been sold worldwide, respectively.
In addition, even though his catalogue has been acquired, the artist still maintains publishing rights allowing him to continue to release new music. He just announced the release of his latest album earlier in 2023. For Hipgnosis, the investment will undergo its first real test with Timberlake's upcoming album. If successful, the 200 song catalogue will receive a halo effect with the older classics seeing a boost in streaming and usage. If not, and Timberlake’s music falls out of touch with audiences, the asset’s value can be undermined.
Furthermore, in the 10 months since the deal, Hipgnosis has continued to acquire the catalogues of numerous other high-profile artists including Rihanna, Nirvana, and Britney Spears, whose catalogues boast a total valuation of $2.2bn. However, despite Hipgnosis’ revenue stream from royalties increasing by 4% in 2022 ($121 million), this figure has fatigued overtime. Moreover, many of Hipgnosis’ acquisitions occurred in a period of ultra-low interest rates. Consequently, with rising rates the fund has seen its profits squeezed. Therefore, shareholders must wait in anticipation to see whether Timberlake’s album can boost earnings and turn around Hipgnosis’ declining share price, which has fallen 25% in the past year.
Risks and Uncertainties
Music royalties as long duration, low correlation assets have gained global traction amidst economic uncertainty. With catalogue deals reaching upwards of $500 million, as seen with Bruce Springsteen’s 2021 deal with Sony Music Group, it’s no surprise that Hipgnosis Songs Fund has added to its 140+ catalogue collection.
Contributions of the acquisition are expected to further improve revenues, particularly given the tailwinds from the strong growth of streaming figures and increasing licensing opportunities across social media platforms. Historical data associates older, ‘evergreen’ catalogues (10+ years) with higher earnings multiples, which Timberlake’s works fall under. The Copyright Royalty Board’s recent approval of a streaming royalty rate increase further reinforces the prospect of strong returns brought by Timberlake’s works.
While concerns have been expressed about the subjective nature of catalogue valuations and potential for overpayment, Hipgnosis’ track record of making significant gains on previously acquired catalogues, and its historically conservative valuation inputs render valuation fears overblown.
However, noting Hipgnosis’ relatively tight working capital, increased liquidity pressures from deal financing arguably poses a greater challenge to the firm’s investment rationale - dividend payments are less guaranteed should its Net Asset Value fall more than 10%. Fortunately, the company recently refinanced its debt facilities, providing some breathing space and increased spending power by $100 million through a fixed-interest-rate Revolving Credit Facility (RCF). Not only does this hedge Hipgnosis against current financial turmoil, but also allows it to operate without raising equity - a move that would dilute existing shareholders in the current bearish equity landscape.
“Justin Timberlake is not only one of the most influential artists of the last 20 years but he’s also one of the greatest songwriters of all time. His hit songs including Cry Me A River, Rock Your Body, SexyBack, My Love, What Goes Around . . . Comes Around, Suit & Tie, Mirrors and Can’t Stop The Feeling are amongst the most iconic of the period.” - Merck Mercuriadis, Hipgnosis Song Management (CEO)