Some major shareholders in the publicly listed Hipgnosis Songs Fund are reportedly preparing to block a proposed sale of a bunch of catalogues to the Blackstone-backed Hipgnosis Songs Capital, with one source telling the Financial Times: “I’d be stunned if it doesn’t get voted down".
Perhaps unsurprisingly, opposition to the sale mainly comes down to the price being offered, with some reckoning that the recent deal between Round Hill and Concord demonstrates that the Blackstone-backed Hipgnosis fund should be paying more for the catalogues it is buying.
Hipgnosis chief Merck Mercuriadis confirmed last month that a provisional $440 million deal had been agreed which would see a number of catalogues currently owned by the Hipgnosis Songs Fund transferred to the separate Hipgnosis Songs Capital, which Mercuriadis formed with investment outfit Blackstone in 2021.
Both funds are advised by the separate Hipgnosis Songs Management company, so if the deal goes ahead, the day-to-day management of the catalogues would basically be unchanged.
The transfer is part of a plan to address concerns about the Hipgnosis Songs Fund share price. Earlier this year Mercuriadis admitted in a statement to investors that “the current share price does not reflect the success of our investment strategy and I know all shareholders share my frustration and disappointment that this is the case”.
If the deal with Songs Capital goes through, the profits from the sale will be used to buy back up to $180 million worth of shares in the Songs Fund and to make some payments on its credit facility, with the aim of boosting the share price.
You might think that would be welcomed by the Songs Fund shareholders who need to approve the deal. However, the FT's sources say, there is currently significant investor opposition to the transaction. One is quoted as stating: “It's all about price - if it was 30% higher then it might make sense".
Another source confirms that the deal recently struck between Round Hill and Concord has impacted on shareholder sentiment. Concord has offered $468.8 million to buy the catalogue of rights owned by the Round Hill Music Royalty Fund, the UK-listed fund set up and managed by Round Hill Music.
The FT's report notes: "The Round Hill deal was struck at a discount to net asset value of 11.5%, compared with a discount of more than 24% in the sale to Blackstone when including costs, tax and lost income". It then quotes one source as saying: "On a headline basis it looks like [Round Hill shareholders] are taking a much smaller haircut than Hipgnosis shareholders".
Beyond deal price, some investors have also criticised the lack of transparency over the costs and tax implications of the Hipgnosis-to-Hipgnosis deal. Stifel analyst Sachin Saggar is particularly critical in that domain.
“Shareholders are angry about the process", he says. "The process seems very heavily favoured towards Blackstone. People feel a bit insulted about the way it’s been dressed up. Optically, I don’t know what Blackstone was thinking".
There could, in theory, be other bids for the catalogues at the heart of this transaction, because other interested parties were given 40 days to make a higher bid when the $440 million deal was announced. But the FT's sources don't seem to think that is likely to happen.
Concern about the catalogue sales transaction comes as investors in the Songs Fund are also preparing for a continuation vote, which is basically where they decide if the fund should continue to operate.
Other concerns have been raised in relation to the general running of the fund, although a number of changes have been proposed. That includes changes to the Fund's board, with two directors, including Chair Andrew Sutch, set to stand down.
On the continuation vote, the FT's report confirms that "investors have been unhappy about the share price performance of the Hipgnosis Songs Fund", but that they “also said that they may still back the company in [the] continuation vote".
"One pointed out that a vote against could lead to a fire sale of assets at lower valuations", the FT article continues, citing that source as saying: “This is still a fantastic portfolio with strong tailwinds behind it. There is still a long runway for growth".
Alongside the big deal with Songs Capital, the Songs Fund is also selling off the rights in 20,000 "non-core songs" that it acquired when it bought a bunch of catalogues from Kobalt back in 2020. And, according to the FT, talks are now underway to sell those songs back to Kobalt.