Can Irenic amicably build shareholder value at Reservoir Media through activism?

Company: Reservoir Media (RSVR)

The company operates a music publishing business, a recorded music business, a management business, and a rights management entity in the Middle East. It operates through two segments: Music Publishing and Recorded Music. The Music Publishing segment acquires interests in music catalogs, signs songwriters to agreements, and earns royalties from them. The Recorded Music segment acquires sound recording catalogs, discovers recording artists, markets, distributes, sells, and licenses the music catalogs. Its publishing catalog includes compositions written and performed by Joni Mitchell, The Isley Brothers, Billy Strayhorn, Hoagy Carmichael, and John Denver. Its songwriters include Ali Tamposi, Jamie Hartman, Oak Felder, and Steph Jones. The company represents over 150,000 copyrights and 36,000 master recordings.

Stock Market Value: $493.95M ($7.59 per share)

Activist: Irenic Capital Management

Percentage Ownership:  8.14%

Average Cost: $6.54

Adam Katz and Andy Dodge founded Irenic Capital in October 2021. The firm invests in public companies and collaborates with leadership. Its focus has been on strategic activism, recommending spinoffs and sales of businesses.

What's happening

Irenic has called for a strategic review and formed a special committee of the board to oversee the process, as announced on Sept. 30.

Behind the Scenes

Reservoir Media, an award-winning independent music royalty company, has a portfolio of over 130,000 copyrights and 36,000 master recordings, focusing primarily on stable music that has remained popular through time. After 12 years as a private company, RSVR went public in July 2021 through a merger with special purpose acquisition company Roth CH Acquisition II. Since then, the company has continued to show year-over year growth, almost doubling its year-over-year gross profit since its first earnings report in March 2021. The company's business model is divided into two main segments: Music Publishing, accounting for 66.41% of total revenue, and Recorded Music, which generates 29.25% of total revenue, both of which grew 14.74% and 21.66% year over year, respectively. A main source for the company's revenue is subscription streaming, which as an industry grew by 11.2% in 2023, representing approximately $14 billion in revenue. Streaming and downloading services currently account for approximately 5

Irenic first reported holding a position in Reservoir in their Q3 2023 13F filing, and the firm later filed a 13D on Dec. 20, 2023, when the stock was around $7 per share. On Sept. 30, 2024, Irenic filed a 13D amendment reporting 8.14% beneficial ownership at an average cost of $6.54 per share and announced that it wants the company to undertake a strategic review and consider a potential sale. We are the first to criticize "sell the company" activism as short term, but sometimes it makes sense, and this is one of those situations. Reservoir is not an operating company, as much as a collector of royalties. In this way, their assets work similarly to a bond that pays a coupon. The coupon here is the royalty payments and those payments increase in one of two ways. First, the musician can sell or stream more music and collect more royalties. RSVR's library primarily consists of mature artists who are not likely to have spikes or dips in their royalty

The acquirer is now the acquiree. A strategic buyer who is willing to pay upward of 15-times NPS for this company is ideal. However, it is more likely that Reservoir will be sold to a financial buyer for two reasons. First, the Khosrowshahi family owns 44% of the common stock and Golnar Khosrowshahi is the CEO. It is unlikely that there will be a transaction in which the family is no longer involved and Khosrowshahi is no longer CEO. Second, she is an excellent CEO in this industry and any financial buyer should be happy to have her at the helm while acquiring additional assets. There is recent precedent for this, too: In July 2024, peer player Hipgnosis was acquired by Blackstone at approximately 18-times NPS. Hipgnosis's portfolio consisted of 138 catalogs with more than 40,000 songs, notably smaller than Reservoir whose catalogs hold over 130,000 copyrights and 36,000 master recordings. Currently, in addition to the Khosrowshahi

The Khosrowshahis' 44% ownership in the company means that any confrontational activism is not an option, but that is acceptable because it is not what Irenic is looking for. The firm believes in the management team and sees itself as a good partner for the company as well as a protector of shareholder value.

Ken Squire is both the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.