What’s happened?
There is a lot going on with UK-listed Hipgnosis Songs Fund (HSF) right now.
On Thursday (April 18), Hipgnosis Songs Fund’s board, led by Chairman Rob Naylor, publicly announced and approved a USD $1.40 billion cash bid from Concord for the entirety of the company’s share capital. (This valued HSF’s portfolio at approximately $2.005 billion, including debt.)
Two days later, Blackstone told HSF’s board it was ready to pay approximately USD $1.50 billion for HSF (valuing the portfolio at approximately USD $2.105 billion) – a proposal that HSF’s board says it will recommend to shareholders when/if it becomes a “firm offer”.
Today (April 22), two more major developments: (i) Hipgnosis Song Management, HSF’s long-time investment manager, has issued a scorching statement regarding its performance to date (which we’ll dig into shortly), and (ii) Sky News reports that, in recent weeks, BMG lodged an “indicative” offer to acquire HSF’s assets, but this was “significantly below” the price level of Concord and Blackstone’s approaches. BMG’s interest in a takeover of HSF has since reportedly waned.
So. Let’s now turn our attention to Hipgnosis Song Management (HSM), and a statement from the company today that MBW is choosing to sum up thusly: Hey HSF, don’t even think about firing us. But just in case you do, know that we and Blackstone will come down on you like a ton of bricks…
What’s the context?
Within HSF’s announcement about Concord’s offer last week, Rob Naylor called on Hipgnosis Song Management to “agree an orderly termination of the Investment Advisory Agreement” between HSM and HSF, partly in order to “bring to an end a period of uncertainty for all Hipgnosis stakeholders”.
Anyone who’s been following the Hipgnosis story for some time knows that this was stuffed with coded language.
Since being hired as HSF’s Chairman in November, Naylor and his board have, on multiple occasions, either issued or commissioned public material that has invited uncertainty over HSM’s conduct as HSF’s investment adviser.
Most recently, HSF’s board commissioned Shot Tower Capital to run a due diligence and valuation report on HSF – inclusive of opinions on HSM’s service to the fund.
The summary of that report, which landed in March, accused HSM of a number of problematic practices, including “diligence and underwriting standards [that] resulted in the Fund overpaying for the majority of the catalogs it acquired“.
In response, HSM said there were “aspects of [Shot Tower’s report] that HSM strongly disagrees with and considers to be misleading”.
Within its report, Shot Tower estimated the fair market value of HSF’s portfolio at USD $1.948 billion, the midpoint of a concluded range of $1.83 billion and $2.07 billion.
Concord’s bid last week implied a valuation for HSF ($2.005 billion), bigger than Shot Tower’s midpoint; Blackstone’s proposal implied a valuation ($2.105 billion), bigger than even Shot Tower’s top-end estimate.
At the center of the tension between HSF’s board and HSM is something Music Business Worldwide first told you about last October: a ‘call option’ etched within the Investment Advisory Agreement (IAA) between HSM and HSF.
Said ‘call option’ dictates that, should HSF’s board ever terminate HSM as HSF’s investment adviser, HSM will have a guaranteed opportunity to acquire HSF’s portfolio for a price according to pre-agreed criteria.
HSF’s board has previously publicly called on HSM to relinquish this ‘call option’ (HSM has declined).
Meanwhile, some observers have suggested that HSF’s board may have been planning to use the findings of the Shot Tower report as evidence in an attempt to fire HSM for ’cause’ – a move that, if successful, would legally neutralize the HSM/HSF ‘call option’.
Over the weekend, while announcing its USD $1.5 billion cash proposal for the takeover of HSF, Blackstone expressed its confidence in the robustness of HSM’s ‘call option’ – stating that it had taken “extensive legal advice” on the matter and had been left confident in the “enforceability” of the clause.
What does Hipgnosis Song Management have to say?
An important distinction before the next part of this story: Blackstone is operationally a separate entity to Hipgnosis Song Management, despite Blackstone being the majority shareholder of HSM (and a co-owner of HSM alongside HSM’s founder, Merck Mercuriadis).
Okay.
Today (April 22), Hipgnosis Song Management has issued its own statement, via a spokesperson.
This statement is primarily aimed at recent criticism of HSM’s performance as investment adviser of HSF, but it also directly addresses the ‘call option’.
You can read this statement in full below, but here are three key things to look out for:
- (i) HSM says that, based on its own extensive legal advice, HSF has “no legal grounds” to terminate its relationship with HSM without the ‘call option’ being triggered;
- (ii) HSM believes that criticism has recently been pointed its way for issues that “were not HSM’s responsibility under the terms of the [agreement with HSF]”;
- (iii) HSM says both it and Blackstone (HSM’s majority shareholder) are “fully resolved to protect all our rights under the IAA, including the right to exercise the call option”.
Aka: Ton of bricks.
Here’s the statement.
“Hipgnosis Songs Fund is a self-managed investment trust with multiple specialist advisers, appointed by [HSF’s] Board, to advise the Board in their respective areas of expertise including accounting treatment, valuations, tax, financial market reporting obligations and legal matters. Under the Investment Advisory Agreement (“IAA”) between [HSF] and HSM, HSM’s responsibilities as one of its specialist advisors are clearly defined.
“HSM has repeatedly been blamed for many issues affecting [HSF] which were not HSM’s responsibility under the terms of the IAA. We have previously sought to address this in private with [HSF’s] Board as we felt it was in the best interests of shareholders to minimize public commentary. Given recent developments we feel it is now important to make our position clear.
“Based on extensive legal advice we are confident that [HSF] 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 [HSF]. [HSF] has not responded to HSM on the legal arguments it has presented.
“HSM has repeatedly been blamed for many issues affecting [HSF] which were not HSM’s responsibility under the terms of the IAA… HSM will vigorously protect its interests should [HSF] purport to terminate the IAA. We will use all means necessary to defend our contractual position and interests.”
“HSM will vigorously protect its interests should [HSF] 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 Advisor and fully in accordance with the IAA.
“To be clear, were [HSF] 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 [HSF’s] assets.”
What happens now?
While the world waits for Blackstone to formalize its USD $1.50 billion offer for Hipgnosis Songs Fund, it’s worth considering what happens if – hypothetically – this bid never comes to pass, or somehow gets rejected by HSF shareholders.
In that scenario, Concord’s USD $1.40 billion offer will presumably win the day.
We already know, however, that, to smooth the path of Concord’s takeover, HSF’s board wants HSM to quietly agree to an “orderly” termination as HSF’s investment adviser.
We also know that ain’t ever gonna happen.
So… imagine a slightly different outcome: somehow, Concord acquires HSF’s assets without HSM being fired. Then, down the line, Concord attempts to terminate HSM as HSF’s investment adviser.
Judging by today’s statement from HSM (and previous statements from Blackstone), it appears almost inevitable that HSM would claim such a termination triggers its ‘call option’.
Presuming that claim was successful, HSM would be clear, using Blackstone’s money, to execute a hostile takeover of HSF’s assets from Concord (which, to remind you of the timeline in this hypothetical story, would have only recently acquired the assets).
As sell-side analyst Numis noted in a research report today: “We believe that Hipgnosis [Song] Management, the manager, still has a call option which gives it the right to purchase the [HSF] portfolio for six months on termination of the management agreement or if there is a bid. Blackstone [has] restated that they believe it is enforceable.
“Ultimately, we believe that this [call option] becomes Concord/Apollo’s issue if they have bought the company, whilst shareholders will have been cashed out at a price they are comfortable with.”
The ‘call option’ would not be an issue, says Numis, “if Blackstone are buying the portfolio”.
One imagines, a few times in the past, when Merck Mercuriadis has broached the possibility of a catalog buyout with superstar songwriters, he’s spoken a less abrupt variation of the phrase: “Check, mate?”
In this case, the comma and question mark are surplus to requirements.Music Business Worldwide
