Stifel analysts have labelled Concord Music’s decision to improve its offer for Hipgnosis Songs fund a “smart move”, saying the bid may test the strength of investment manager Hipgnosis Songs Management’s (HSM) call option.
This morning (25 April), Concord raised its offer for the music rights trust to $1.25 a share, a single cent more than Blackstone’s potential bid of $1.24 per share.
Blackstone responded to the development, saying it advises Hipgnosis shareholders to take no action while it considers its options.
The Hipgnosis board said it would recommend the Concord Music offer to shareholders, with a court and general meeting set to take place on 10 June.
See also: Hipgnosis Song Management: Board has ‘no legal grounds’ to terminate relationship
Call option
The trust’s investment manager Hipgnosis Songs Management (HSM), which is majority owned by Blackstone, has previously said it will “vigorously protect its interests” against the board’s potential termination of the investment advisory agreement.
HSM retains a ‘call option’, allowing it to make an offer for the trust’s assets in the event it is removed from its role.
Stifel analysts said: “This is a smart move by Concord, in our view. Conventional wisdom was that we were waiting for Blackstone’s proposal of $1.24 (c.100p) to become firm before waiting to see what Concord would do. By trumping Blackstone’s proposal before it has become firm, if only by 1p, we think it is basically calling Blackstone’s bluff and indicating that it believes the HSM call option is worthless.
“The key aspect to understand now is whether the price has gone beyond a level that Blackstone is willing to pay. This will then decide whether the strength of the call option will be tested. We understand the Blackstone Tactical Opportunities fund has a target net IRR of 12-14%.
“There is a case that as music is likely to be negatively correlated to the rest of the portfolio, the target return from this asset class will be lower at say 9-10%. However, we still cannot see how this competes with a pension fund that we assume has a target return of around 7%. Hence, any counterbid is not likely to be based on economic terms, in our view.”
The analysts added they believe Concord Music is in pole position to acquire the assets.
“Since Blackstone acquired majority ownership of HSM, the investment adviser, three years ago, we have felt it has been indifferent to the sector given how slowly it has attempted to professionalise the HSM platform,” Stifel said.
“It is also odd that a third party firm has been able to put together two firm proposals ahead of the investment advisor who has been managing the assets and has only been able to come up with several proposals.
“It appears that Concord is in prime position to win these assets and potentially also flush out a competitor who at some stage may also decide to sell its private catalogues if it exits the sector. This is the upside scenario for Concord.
“For Blackstone, the HSM investment appears to have had a series of errors and either it overpays for these assets to ensure that HSM remains viable or takes a reputational impact given how public this process has been.”
