Hipgnosis Song Management (HSM), the investment adviser to music royalty trust Hipgnosis Songs Fund (SONG), said it will “vigorously protect its interests” against the board’s potential termination of the investment advisory agreement, following its bid for its entire issued share capital yesterday morning (22 April).
Last Thursday (18 April), Concord, a music rights company which previously acquired fellow royalties trust Round Hill, announced a recommended cash bid for the entire issued share capital of SONG. The bid, which was valued at a 32% premium relative to the trust’s closing share price that day of 71p, was recommended by the trust’s board, with a spokesperson urging HSM to “agree an orderly termination of the investment management agreement”. Shareholders could also be entitled to an additional consideration of $25m, if SONG and Concord agree to terminate the management agreement.
Concord’s proposed purchase originally received support in the form of an ‘irrevocable undertaking’ to support the deal from some 30% of its shareholders, including CCLA, Schroders, Asset Value Investors, Hawksmoor Investment Management and Premier Funds Management. As of this morning, however, JO Hambro sold 5,417,761 shares in SONG, having previously owned 20,453,123 – or 1.69% of the overall portfolio. This therefore means the firm is no longer able to vote the sold shares in favour of the acquisition and that 23.1% of issued share capital is subject to irrevocable undertakings.
The deal would require a 75% approval from shareholders in order to get over the line, with the original aim of completing the deal by Q3 2024.
Yesterday morning, however, Blackstone – the majority owner of HSM – posted a rival bid of $1.5bn (£1.2bn) for the trust, relative to Concord’s $1.4bn bid (marking a 6.9% increase), although a firm offer is yet to be made. Within the investment management agreement, there is a clause which allows HSM six months to make a counter bid in the event of a bid for the portfolio from a third party.
According to Blackstone, this is the company’s fourth attempt at an offer. Hipgnosis shareholders previously rejected the proposed sale of 29 music catalogues to Hipgnosis Songs Capital in October last year – a separate private equity vehicle which is also majority-owned by Blackstone – amid allegations of ‘cherry-picking’ certain holdings to sell.
Last month, Shot Tower Capital published an independent due diligence review, which concluded that HSM “failed to perform to music publishing industry standards” and did indeed hold a “conflicted position” in terms of recommending the purchase of catalogues by HSC, which were growing at “materially higher rates” relative to the rest of the portfolio.
HSM will ‘vigorously protect its interests’
Yesterday afternoon (22 April), HSM has issued a statement saying it has “repeatedly been blamed for many issues affecting the company which were not HSM’s responsibility under the terms of the IAA [investment advisory agreement]”.
It stated: “Based on extensive legal advice we are confident that the company has no legal grounds to terminate our relationship without being subject to HSM’s contractual rights contained in the IAA. HSM has explained this in detailed legal correspondence with the company. The company has not responded to HSM on the legal arguments it has presented.
“HSM will vigorously protect its interests should the company purport to terminate the IAA. We will use all means necessary to defend our contractual position and interests. It is important that shareholders, songwriters and artists understand that HSM has acted appropriately and professionally in our role as investment adviser and fully in accordance with the IAA.”
In addition, HSM referred to the call option it currently holds, despite repeated calls from the trust’s board to remove it. This gives the investment adviser the right to buy the trust’s entire portfolio, if its position is terminated.
The call option was originally put in place by former CEO Merck Mercuradis as part of the management of artist relationships, having convinced songwriters that he would personally be required to take care of their legacy and that the portfolio should not be allowed to be taken away from him in their own interests.
HSM said: “To be clear, were the company to purport to terminate the IAA and/or hand HSM’s responsibilities under the IAA to a third party, HSM and its majority shareholder are fully resolved to protect all of our rights under the IAA, including the right to exercise the call option to acquire the company’s assets.”
SONG board’s response to Blackstone bid
In response to Blackstone’s bid, the board said it has “indicated to Blackstone that the proposal is at a value that it would be minded to recommend to its shareholders should Blackstone announce a firm intention to make an offer”.
“The board and its advisers will continue to provide Blackstone and its advisers access to confirmatory due diligence, to enable Blackstone to announce a firm intention to make an offer, as soon as possible,” it stated.
“There can be no certainty that a firm offer will be made for the company by Blackstone, nor as to the terms of any such offer. Accordingly, shareholders are advised to take no action at this time with regard to the approach by Blackstone.
“The Hipgnosis directors continue to recommend unanimously to Hipgnosis shareholders the cash offer by Concord Chorus Limited, an entity indirectly controlled by Alchemy Copyrights LLC. That recommendation has not been withdrawn, qualified or modified.”
Market is pricing in a bidding war
Ewan Lovett-Turner, research analyst at Numis, said Blackstone’s proposed bid is “a further positive development for shareholders”, with the trust’s share price rising by 10% yesterday morning following the news.
“We believe the Concord offer was attractive, given where the shares have been trading and sentiment towards the company. A higher price from Blackstone would be an even better result. The Blackstone proposal is not yet a firm offer and therefore the board maintains a recommendation for the Concord cash offer, but we can understand why the board is “minded to recommend” the Blackstone offer if it were to become a firm offer.
“Shareholders will be keen to end the Hipgnosis saga that has likely taken up a lot of portfolio management time and certainly significant column inches.”
He added that, given SONG’s share price is up 44% since last Wednesday’s close, shares are currently above the implied offer price from Blackstone of 100p, which means the market is “pricing in further potential for a competing offer”.
“It will be interesting to see what is the next move from Concord. We believe that the bidding war is an excellent outcome for shareholders, who have experienced a turbulent journey, and credit goes to the board for mitigating some of the impediments to a competitive process.
“It will give investors a clean cash exit at what appears to be a reasonable price and end a saga that will having been taking up a lot of portfolio managers’ time. We calculate that an investor at IPO, would have generated a return of 23% based on the offer price plus dividends over the life of the investment.”
Shonil Chande, analyst at Liberium, concurred that a confirmed bid from Blackstone, should it come to fruition, would present “materially better value to shareholders than the Concord offer”.
“A big unknown has been cleared up over the weekend in that there is no doubt that Blackstone is significantly interested in these assets. The call option and the potential for a bid from either Blackstone directly or via HSM was mute unless Blackstone was interested enough in the assets to provide the financial backing,” he explained.
“There are still complexities and the potential for more were Concord to raise its bid. Blackstone Europe noted that ‘it is intended that such a firm offer would be effected by means of a takeover offer’. However, Blackstone would reserve the right, pursuant to its rights under the code to implement any such firm offer by way of a scheme of arrangement under Part 26 of the Companies Act 2006 should a firm offer be announced.
“We would expect the board to recommend a $1.24 proposal providing it does become a firm offer and while the proposed price is not 10% above the Concord offer, we would still expect the highest bid to ultimately be the successful one.”
David Schulhof, CEO of MUSQ, said: “HSM clearly wants to stay in control of the company and is using its call option to block the sale of Hipgnosis to Concord. On its surface, a higher bid means a better return for shareholders.
“Whether this is in the best interest of the company long term has yet to be determined. Blackstone’s bid is also still in the confirmatory due diligence phase so this price may be lowered at some point in the near future.”
