The rising popularity of streaming services such as Spotify and Apple Music – especially during lockdown – has caught the attention of investors because hits with enduring appeal can offer steady returns when interest rates are floundering.
Hipgnosis has started the year with a flurry of transactions, buying up the song rights to artists including Shakira, Neil Young, Lindsey Buckingham of Fleetwood Mac and Jimmy Iovine, the producer and co-founder of Beats headphones.
It gulped down another song book on Thursday when it struck an undisclosed deal for the right’s to music producer Bob Rock, which included tracks by Canadian singer Michael Buble and iconic metal band Metallica.
Hipgnosis also began laying the groundwork for fresh spending splurge by announcing its intention to issue new shares at 121p.
Support from some of the UK’s biggest institutional investors – including Schroders and Standard Life Aberdeen – have helped Hipgnosis shares rise 14pc in two years.
However, Stifel’s analysts have struck a discord for the company in recent weeks over claims it has been revaluing catalogues after purchase to meet the fair value provided by Massarsky, one of the company’s independent valuation agents.
The broker claimed the catalogues were enjoying a “positive bump” in net asset value (NAV) after purchase, which allowed Hipgnosis to “perpetuate a cycle of raising capital aggressively”.
Massarsky responded by accusing Stifel of making “a number of mistaken claims regarding the methodology” and said there was no intention to “bump” value.
Mr Mercuriadis said Massarsky was not part of the pool of 10 valuers at the time of buying a catalogue and only used it when calculating net asset value twice a year.
He added: “The reason we felt that was good governance because we felt that would build another layer of protection into the process because effectively the person doing the NAV wouldn’t be relying on work that is done already – they would have to do the work from scratch.”
Stifel also raised a red flag over rights payments, claiming there was a risk estimates could be wrong because of a “significant lag between revenues being booked and cash being received”.
Mr Mercuriadis said his auditors PwC ensured accruals were made in line with accounting standards and had given the company a clean bill of health in every period it had assessed.
He also moved to dismiss Stifel’s concerns about his ability to buy well, saying the value he secured was symptomatic of the trust put in him by artists.
Hipgnosis secured song rights to artists to Bon Jovi’s Ritchie Sambora and Wu Tang Clan’s RZA despite both artists receiving higher offers from rival music funds, Mr Mercuriadis added.
“For us the vast majority of our pipeline is private and off market not auctions – we compete very little in the public space,” he said.
“I spend the vast majority of my time speaking to people who are not in the public space, but songs and assets I appreciate very highly and know and believe in and I am able to impress upon the person how much their catalogue means to me.”
Stifel declined to comment.