Everyone’s been there. You’ve found something simply marvellous on eBay, put in an early bid, and with days and days before the auction ends you take a quick look to see what’s happening. You’ve outbid user AF002 (hurrah!) but everything is suspiciously quiet. “I’m going to increase my maximum bid by £10”, you say to yourself, “just in case”.
A few hours later you check back. AF002 is still silent. No movement. No bids. Even more suspicious. There’s clearly something brewing. A last second attempt to pip you to the post? “Let’s stick on another £24.73. Round numbers are too easy to guess”, you say, and slam your laptop shut. By that time the red mist has set in, and you end up paying way over the odds for some pointless trinket that you didn’t need, don’t really want, and can’t even get delivered.
The psychology of bidding for things is exhausting.
Have pity, then, for the financial boffins at Blackstone and their carefully crafted bid for Hipgnosis Songs Fund, or SONG. After trumping Concord’s offer at the end of April, Blackstone had 28 days to get an offer document out to shareholders by post, which meant those envelopes should have been flopping onto doormats around the bank holiday weekend. Just before that deadline expired, Blackstone filed a regulatory update saying that there would be a “short delay” and the required documentation would be delivered no later than today.
That document was sent out today, with the surprise news that, with no other competing bids on the table, Blackstone has decided to up its bid by $0.01 - to $1.31 per share - representing a cool $12 million on top of its already generous offer for SONG. While some might say that when you’re already paying just shy of $1.6 billion for something, $12 million is easily overlooked, others are confused as to why - when you’ve already apparently done the deal - you’d pull another $12 million out of your back pocket and throw it onto the table.
“The increase of $0.01 per Hipgnosis share from the acquisition price to the revised offer price has come about as a result of discussions between the Hipgnosis board, Bidco board and their respective advisers and in part reflects Hipgnosis incurring lower adviser fees in respect of the transaction than previously expected”, says the regulatory document posted by Blackstone.
“The Bidco board and the Hipgnosis board are pleased to announce that they have reached agreement on the terms and conditions of an increased and revised recommended cash acquisition by Bidco in respect of the acquisition”, says the document.
The key difference between this offer and the previous one is that the UK’s Takeover Panel “has granted its consent… for the acquisition to be implemented by way of a scheme of arrangement”.
Clear as mud! What’s actually going on here is twofold: firstly, the amount SONG has spent on advice relating to the takeover is less than anticipated - which means that at the point SONG is subsumed fully into the Blackstone empire, there will probably be a little bit more cash in the bank.
More importantly - and perhaps more interestingly - is that this little bump in the price being offered to shareholders seems to be designed to sweeten the deal just enough to allow Blackstone’s takeover to proceed as a “scheme of arrangement” rather than a simple “offer”.
The difference is to do with so-called “squeeze out” provisions, which compel shareholders to sell their shares, whether or not they support the takeover. Under a standard takeover offer, an acquiring company needs support of 90% of shareholders in order to be able to implement a squeeze-out that forces any hostile shareholders to give up their shares. With a scheme of arrangement, that threshold drops to just 75%.
What’s interesting to note is that Concord’s bid had irrevocable commitments from just over 25% of shareholders - including Asset Value Investors, or AVI, long-standing critics of the way SONG was being managed. AVI’s Tom Treanor had previously called for a “total reset” of the way SONG was run, and was outspoken in his criticism of Hipgnosis Song Management, the Merck Mercuriadis-run, Blackstone-owned investment adviser to SONG.
However, according to documents seen by CMU, AVI had dumped its entire holding of more than 90 million shares in SONG by 20 May.
Concord’s bid also disclosed that it held a letter of intent supporting its bid from Investec, which held more than 109 million shares in SONG. However, by 1 May Investec had sold the majority of its holding, reducing its stake to just 11.5 million shares, a holding of just under one percent.
Remaining significant investors in SONG include TIG Advisors LLC, a New York based hedge fund, which increased its stake in the company by nearly nine million shares on 31 May, giving it 7.61% or 92 million shares. According to recent filings Morgan Stanley controls around 9% of SONG, while Kryger Capital and Glazer Capital - also hedge funds - have positions of 5.84% and 6.88% respectively.
With those combined stakes alone accounting for well over 30% of SONG’s total issued shares - and a significant number of hedge funds holding stakes of one or two percent - Blackstone needs to ensure that its offer is as attractive as possible. With many hedge funds looking for quick and easy returns, the $0.01 boost on the offer may be enough for it to hit the critical 75% of investors it needs to enable a squeeze-out of any minority shareholders, allowing it to acquire 100% of the shares, giving it complete control of the fund and its valuable catalogues of music rights.
Without hitting that threshold, the scheme of arrangement would fail, leaving Blackstone in the tricky position where it would acquire the majority of the shares in SONG, but with a potentially troublesome “rump” of shareholders who refuse to sell, making everything much slower, and much messier.