Anyone who has ever owned a cat will know the problem. You open a nice tin of tuna, and suddenly there it is, hovering behind you in the hope that there might be something tasty coming its way. God forbid its cat friends get word that there’s something tasty on offer, otherwise you might find yourself overrun.
When you’re a multi-gazillion dollar private equity company, the problems are the same. You make an offer to gobble up a particularly delicious looking portfolio of music rights, and suddenly a bunch of hedge fund fat cats come circling, swishing their tails and yowling miserably as though they’ve not had a square meal in weeks.
Welcome to Blackstone’s current Hipgnosis-shaped problem: recent transactions involving a number of hedge funds could be about to add another dramatic twist to the investment firm’s plan to acquire Hipgnosis Songs Fund, or SONG. That is despite the fact that, until very recently - and after a bit of back and forth with rival bidder Concord - it looked like Blackstone’s deal to acquire SONG was a done deal.
Just a couple of weeks ago Blackstone found another few million quid down the back of its sofa and used it to sweeten things a little more. The hope was that this cash would be enough to get shareholders to clear the path to allow a quicker and cleaner takeover, known as a ‘scheme of arrangement’.
Under the scheme of arrangement Blackstone needs 75% of SONG shareholders to back its takeover deal - and if it can secure that, all shareholders are bound by that decision, and any who didn’t vote for it have to sell their shares to Blackstone whether or not they like it, giving Blackstone 100% control. A few weeks back, that looked fairly likely.
One of the chief agitators in the recent SONG drama was Asset Value Investors. After Blackstone pipped Concord’s offer, AVI unloaded its entire holding of 90 million shares in SONG, generating proceeds of £91 million. In an email to investors in its AVI Global Trust, AVI said that its exit from Hipgnosis Songs Fund “marks the end of a highly successful investment for AGT, in which we played a key role in fighting off the proposed related-party sale of a portion of SONG’s catalogues and also making the case against the company continuing in its present form”.
A clutch of other institutional investors - including TIG Advisors, Kryger Capital, Glazer Capital - held relatively chunky holdings in SONG. However, common wisdom seemed to be that the extra cash that Blackstone had ponied up to increase its offer from $1.30 a share to $1.31 would be enough to satisfy them and get the vote across the line.
At least, it looked that way. But over the past few weeks, TIG has been snapping up SONG shares like they are going out of fashion, increasing its stake in the company from a comparatively modest 92 million shares at the end of May to a heart-stopping 171 million shares as of 21 Jun. That stake represents a whopping 14.13% of SONG, while Kryger and Glazer hold 6.64% and 7.92% respectively, up from 5.84% and 6.88% back at the start of this month.
Between those three hedge funds - which have each been very actively acquiring bigger stakes in SONG over the past few weeks - they control 28.69% of SONG’s shares.
Add in a further 6.19% controlled by Sand Grove Capital Management, which has been quietly sitting on its stake since late May, and a clutch of other hedge fund stakes - including Natixis, Samson Rock Capital, Millennium, Decagon and Trium - amounting to 9.6% and Blackstone might have a bit of a problem.
As already noted, in order to institute its ‘scheme of arrangement’ and take full control of SONG, Blackstone needs 75% of shareholders to vote in favour. With nearly 35% of shares in the claws of just four investors, and another 10% controlled by other hedge funds, speculation was beginning to emerge that Blackstone was about to be the victim of a group of very well dressed muggers who felt that there might be just a little more upside to be squeezed from the deal.
In particular, TIG had forked out for 27,386,100 shares at a price in excess of the $1.31 offer price and in the recent days had snapped up a further 38 million in a series of transactions leaving a cent or less profit per share.
By Tuesday afternoon, Blackstone’s Lyra BidCo had had enough. In a statement filed as the markets closed, it made clear that the terms of its revised offer of $1.31 per share “are final, and will not be increased”.
And that should have been that. With no possibility of more money on offer, speculation should stop, and the hedge funds should stop buying up shares, or even begin to unwind their positions, to limit their risk.
If there’s not a chance of more money, no one would continue to buy shares at prices within a hair’s breadth of the $1.31 offer, surely? So you’d think.
Some clearly agreed. Yesterday afternoon - two days after Blackstone clarified that its offer was “best and final”, Athos Capital offloaded 5 million shares. However, Glazer Capital - the day after Blackstone’s announcement - bought a further 1 million shares, with a regulatory filing showing that they paid $1.30 per share, and now held 8.01% of the shares. TIG sold 2.8 million shares at $1.295, but then bought a small number back at $1.2973, while Samson Rock snapped up nearly 1.5 million yesterday at a similar price.
So much for hedge fund speculation stopping.
With the shareholder meeting on 8 Jul still some time away, a lot could happen - and with hedge funds seemingly still willing to bet that they can turn a profit buying shares within fractions of a penny of the offer price, it seems that at least some investors are betting that Blackstone’s “best and final” $1.31 may turn out to be not quite so final after all.
While Blackstone has made it clear that it’s not going to put any more money on the table, there’s one possible circumstance outlined in its announcement that would allow it to open its wallet again. “If there is an announcement on or after the date of this announcement of an offer or a possible offer for Hipgnosis by a third party offeror or potential offeror”, says Blackstone, then it “reserves the right to increase the amount of the offer price”.
Another bidder, days before the deal is done? That would be crazy… Wouldn’t it? If there’s one thing we have learnt throughout the Hipgnosis drama, it is to expect the unexpected.
However, the announcement also opens the door to a second alternative - and one which might be more realistic. That is that Blackstone “also reserves the right to elect to implement the acquisition by way of an offer as an alternative to the scheme”.
While that would need a much lower threshold of shareholders - 55% vs 75% - to approve the deal to get it across the line, it would also substantially increase the percentage of shareholders that would be required to implement a squeeze-out to 90%. Quite what happens then is anyone’s guess; Blackstone is limited by the Takeover Code on how much individual horse trading it can do, and might have to try to acquire additional shares bit by bit to get it to a stake big enough to take full control.
There is, of course, one final option. If Blackstone can’t get 75% of shareholders to vote for the scheme of arrangement, and can’t get 55% of shareholders to vote for the takeover offer, then the whole deal collapses. If that happens it would be a disaster for Blackstone. Under takeover rules it would not be able to mount another bid for twelve months.
It might also be a disaster for shareholders, with SONG back in play, with goodness knows what result.
Or, just maybe, that might be exactly what some investors want.
As this story was being finalised, TIG Advisors filed a regulatory statement at 3.02pm showing that after selling 2.8 million shares at $1.295 on Wednesday, it bought 2 million of those back at $1.2925 yesterday.
With so much of the Hipgnosis story, nothing is over until the fat lady sings.
UPDATE 28 Jun 2024, 4.30pm:
Glazer Capital filed a regulatory statement at 3.25pm this afternoon showing that it purchased a further 3 million shares in SONG yesterday, 27 Jun, paying $1.30. It now holds 8.26% of the total shares.