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Mills Music Trust (OTCPK:MMTRS) was set up in 1964 in order to retain the ability to receive a portion of the musical royalties tied to the songs that the parent company, which was being sold, owned. These royalties are received by MMTRS until the song enters the public domain which usually occurs after 95 years (but can be prolonged). The current expiration dates of the songs vary with some expiring as late as 2076. EMI Mills Music Inc. is in charge of collecting, managing and distributing the royalties to the trust.
The catalogue of 25,000 songs that MMTRS 'owns' is not public, but since 2011 EMI sends the trust a list of Top 50 grossing songs for each year. These usually account for more than 85% of the royalties and only roughly 1,600 songs are actively receiving any royalties. Thus there is a considerable concentration of the distributions in only a few songs.
The trust does not own anything else, it does not produce a balance sheet or a cash flow statement, just a simple income statement with the distributions and administrative expenses.
There are three main owners of the trust units. 26.8% is owned by MPL Communications, Ltd, which is a holding company of Paul McCartney (yes the one from Beatles) that owns the units since at least 1997. The second biggest owner is First Eagle Investment Management, an asset manager which owns 11.4%. The last major owner is Michael E. Reiss a partner at a value fund Buttonwood Tree Value Partners who owns 8.9%.
Mr. Reiss is also a trustee who oversees MMTRS since late 2013 alongside Mr. Lee Eastman who was also named a trustee in the same year and is connected to MPL Communications.
MMTRS distributes the royalties on a quarterly basis and regularly files with the SEC.
The key here is to estimate what will be the future distributions and whether at the current price the investment would make sense as theoretically the trust value should decrease over time as the songs begin to enter the public domain.
I believe that as of now there is an opportunity to initiate a position due to the following points;
- At a conservative estimate, the initial investment at the current prices could be earned in around 11 years yielding roughly 9% per annum. This is based on historical payouts and trends of the distribution composition. While one might think that the trust should earn less and less, especially on songs that have been around since the 1920's the trend is not clear and has not been materializing as one would expect.
- This argument is supported by the fact that in the last three years (since this data is available) five songs have accounted for more than 50% of the gross royalties received by EMI. Only two of these songs enter the public domain in the 2020's (the least grossing in 2027 and the second lowest grossing in 2023).
- The recent distributions of MMTRS were also smaller than usual due to increased administrative expenses. These are reasonable as the trust has an ongoing dispute with EMI over the distributions. The company believes that EMI underpays the trust and currently owes MMTRS roughly $0.44 million. I believe that the trust might be able to win or at least settle due to past dealings with EMI as they already admitted to miscalculating distributions in the past. Once this is cleared out not only that the trust could gain extra royalties but it could also go back to lower expenses and thus support distributions further.
On the other hand, the following risks should be accounted for by the investors;
- The share price matters and while the next eleven years could be relatively stable and earn investors their initial investment the yield could be significantly dampened should the stock start to sell off due to possibly decreasing revenues.
- While it seems that this is not likely to occur due to the composition of the song portfolio and the surprising resilience of the distribution stream (given Internet etc.), there are many fundamental risks that are hard to predict and that could occur in the future.
To conclude I believe that at the current prices investors are able to initiate a position through which they could regain their initial capital in a reasonable amount of time at an interesting yield, although I believe investors that are willing to take a longer outlook (15 years+) might be able to benefit from even better yield and possibly smaller share price risk.
Past distributions and song performance
As mentioned the revenue stream has been surprisingly robust given what one could expect from songs originated in the years 1922 to 1958.
Note: EMI incurs expenses related to the royalties (such as renewal of the copyrights etc.). The breakdown is first available for 2012. These expenses are the predominant reason for 2013's low amount of royalties received (although the gross royalties were also slightly lower).
While it might seem that we are entering a period of lower royalties received going forward one can see that the songs are still performing well and that the overall volatility of the royalties is low (the chart's range is tight prior to 2013 and for example royalties from 1992 are lower than in late 2000's).
The fairly low volatility could be explained by the concentration of the royalties as Top 50 songs routinely account for more than 85%.
Note: 2012 and 2011 are quoted as royalties received from EMI, the rest is gross royalties earned by EMI. This data was made available for the first time in 2013.
This then means that one needs to understand the volatility in these top songs. I chose to dissect the Top 10 for each year as it still represents the majority of the royalty base.
Note: I took the occurrence of each song in the past five years, but the royalties only in the past three years as in 2012 and 2011 the company only reported royalties per song as received by MMTRS, not gross royalties that EMI recorded.
As you can see there is some volatility in the songs. One example could be Caravan which likely earned significantly more than in past due to the film 'Whiplash' in 2015, but given the fact that such a significant portion comes from only few songs I believe it is unlikely that the royalties stream should radically change over the next few years.
Moreover, the second important point is that the expiration of the top grossing songs is in the distant future and the company should only lose 20% to 30% of revenue in the next 11 years as I specify in the future distributions section.
While the past performance of MMTRS is interesting and shows that the royalty stream is likely to be intact going forward, one has to remember that this is a sample from the past 5 years as there is limited data available and therefore the prior periods might have looked differently.
Disputes with EMI
Not only that the fundamental outlook is not necessarily bleak given the fact that the songs were able to continuously gather enough royalties at a relatively low volatility, but the trust could also see increased distributions coming from EMI given an ongoing battle regarding the way EMI computes the trust's share of gross royalties.
EMI receives gross royalties from which they take away expenses such as copyright renewal and royalty related expenses. Then EMI takes away a portion of the share for itself and the rest goes to MMTRS as can be seen below.
In the original agreement from 1964 EMI agrees to compute the trust's share in the following way. Until 2010 MMTRS's portion was computed as the excess of the gross royalties collected by EMI less royalty related expenses (payments to authors etc.) and by greater of the following;
- 25% of gross royalties or
- $87,500 or 30% of gross royalties, whichever was less
There was also a minimum distribution requirement which was set at $167,500 per quarter and if the quarterly distributions were larger than $0.5 million then the percentage of 25% was changed to up to 35%.
In 2010 the agreement stipulates that the minimum distribution provision is discontinued and that the percentage of the deduction from the gross royalties is fixed at 25% (i.e. disregarding provision 2b).
EMI continued to pay MMTRS's distributions under the old calculation method until the third quarter of 2010 when the trust notified the company of the new calculation method that should have been applied. EMI agreed to start to calculate the distributions under the new method. This lasted though only until Q3 of 2012 when EMI's legal counsel suddenly said that they dispute the interpretation of the 1964 agreement and reverted back to the old calculation.
The reason why they might be incentivized to do so is that under that regime EMI stands to receive more money as the percentage of deduction ( originally 25% of gross royalties) can change if the gross royalty income is larger than $0.5 million as seen below.
Due to this MMTRS now believes that EMI underpaid the trust by the following amounts;
One can though potentially understand why EMI is trying to dispute this as the wording of the agreement is unclear regarding a specific paragraph about the 2010 change in the document. It is unclear whether paragraph 1,A,III holds for the paragraph 1,D to be specific.
That being said I believe that past performance of EMI in managing the distribution process is dubious to say the least as seen in the following points;
- In 2007 EMI tried to charge the trust extra royalty renewal expense and said that the minimum quarterly distributions of 2001 (connected to these expenses) were only advances, which MMTRS successfully argued against and in the end was not liable to pay anything.
- In 2011 the trust launched an audit into the past ten years of the distributions. This was aimed to see whether there were any material underpayments by EMI. The audit found multiple instances of this and the trust sued EMI for $2.6 million, in the end they settled out of court for $0.6 million in favour of MMTRS.
- In 2015 the trust found that even under the disputed calculation method (which EMI reinstated in 2012) the company underpaid them given the information EMI has provided. EMI acknowledged this error and repaid the amounts.
All this shows that EMI is likely not handling the trust fairly and there might be opportunity for recovering the disputed amount or even for another settlement as MMTRS launched another audit into the calculations of EMI in late 2015.
Last but not least in 2013 the trust named two new independent trustees. This should ensure that the trust is getting its fair share from EMI and that the current dispute will be resolved. Especially because Mr. Reiss is a fund manager of Buttonwood Tree Value Partners, which is known for activist campaigns and various litigation.
In the end though, as mentioned in the thesis not only that a resolution of the dispute might end up favorably for MMTRS, once the dispute is resolved the expenses of the trust will drastically come down and could settle at the historical levels of around $0.1 million per year. This comprises of audit fees, trustee compensation and the trust administration expense. Given that the current expenses can be as high as $0.6 million as seen below, it means that this could materially improve the future distributions.
Possible Future Distributions
The following is inherently more of a forecast than I am naturally inclined to perform, but given the structure of the trust there is not much else one can do to try to estimate some sense of valuation. In order to prevent biases, I have included two scenarios that I feel are reasonable.
The base case scenario involves the following assumptions;
- Expenses are going to come down after a couple of years to the historical norm due to the fact that the trust will resolve the dispute with EMI. The forecast does not involve MMTRS winning the dispute and receiving the alleged underpayments or that EMI is going to start paying more due to the switch in the calculation method.
- The royalties of the songs are going to decrease over time based on the amount that might be lost as songs will enter the public domain. The summary of this can be seen below;
Note: The chart uses the expiration dates of the Top 50 songs and combines the royalties they brought. This is done for each year due to the variation in royalties per song.
In the forecast, I used the 2015 implied lost royalties. I expect the distributions to come down from $0.8 million to $0.5 million in the respective period, or an approximate decrease of 37.5%.
These then results in a forecast that implies a 9% yield per annum and 11 years until investors receive their initial investment.
The bear case scenario is based on the following assumptions;
- The expenses are going to come down for some time, but I believe that it could be that MMTRS is going to need to audit EMI again or will face another dispute thus there might be increases in the expenses in the future.
- The royalties are going to decrease faster and slightly more than just by the expiration periods.
This would then prolong the pay-off date to 15 years and imply a yield of 6.6%.
I have not used any discount rate on the future distributions as I believe that they are already partially discounting the possible resilience of the revenue stream as seen in the historical performance. I have also not discounted the distributions for possible taxation which investors should consider in this case.
- Share price risk
As mentioned this is the crucial risk as it could dampen the yield of the investment. That being said even past the year 2028 the trust will be worth something as the main portion of songs will start to expire in 2040's therefore it is unlikely that the share price should plummet significantly by then.
Moreover, the past share price action shows that the stock might not reflect the underlying value of trust well as the shares of MMTRS are now near 20-year lows as seen below.
Thus I believe the share price risk is lowered by this possible disconnection between the trading price and the underlying value. The share price will though for sure matter in around 25/30 years when the value of the trust might be clearer than now.
- Fundamental risks
As mentioned, my thesis relies on the fact that the past performance of the songs is going to at least partially hold. This might not be the case if they fall out from popularity etc. I do not believe that this should occur in the next couple of years given the fact that maybe only significant shifts in generations could depress the performance of the songs, but this is, of course, a rough estimate.
- Copyright risk
The last major risk that I see with MMTRS is that if copyright laws should change dramatically, this could affect the ability to earn the royalties. While there is an ongoing discussion in the US regarding the laws, any significant change is unlikely to occur in the next couple years as suggested here.
The article also shows an important point. The discussion is political and there are two main interest parties involved. The licensors (creators, companies like EMI etc.) and the licensees (the entities that actually use the music). One could venture a guess that the licensors have much more leverage in this process and thus a radical change that would swing the situation against MMTRS is unlikely.
MMTRS offers a peculiar investment opportunity that is best taken with a long-term outlook. I believe that songs in the portfolio of the trust are not likely to disappear in the next 11 years in which the investors could earn their initial investment. This though also assumes that the share price is not going to be volatile and is not going to dampen the annual yield.
This though might not be likely as there is a plethora of risks that could occur and therefore investors are better off holding the trust with the outlook of around 25 years which could ensure that any capital loss will be well compensated by the distributions.
P.S. I recommend listening to (or even better yet buying or performing publicly) 'It don't mean a thing' from Duke Ellington, my absolute favorite from the Top 50 list of MMTRS.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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