Hipgnosis Songs Fund (HSF)’s board is having a tricky time of things. That’s largely down to two factors connected to the UK-listed fund’s independent valuer: New York-headquartered Citrin Cooperman.
Firstly, in Citrin Cooperman’s eyes, HSF’s assets (as of end of March this year) carried an operative NAV (Net Asset Value) of USD $2.316 billion. Right now, HSF’s market cap sits at about half the size of that figure.
Secondly, HSF updated investors earlier this week with the deflating news that Citrin Cooperman had unexpectedly corrected, by a significant margin, its expectation of the money coming to HSF as a result of ‘CRB III’ in the United States – down from $21.7 million to $9.9 million.
The knock-on effect of Citrin Cooperman’s mathematical adjustment? HSF telling investors that it will no longer be able to deliver their expected interim dividend later this month.
Today (October 19), Hipgnosis Songs Fund’s board informed shareholders that it has now begun a ‘Strategic Review’ of HSF, including, amongst other things, “a review of the future management arrangements of the company”.
HSF’s Strategic Review notice partly focuses on Hipgnosis Song Management (HSM), the firm co-owned by Hipgnosis Songs Fund founder, Merck Mercuriadis. HSM has in the past acquired copyrights on behalf of two funds: (i) The publicly-listed HSF, and (ii) The Blackstone-backed private fund, Hipgnosis Songs Capital (HSC). (Blackstone is also an investor in HSM.)
For some time now, MBW has reported that sources close to this triumvirate of Hipgnosis companies have informed us of something important: HSM, we’d heard, has some kind of first-refusal clause in its contract with HSF which means that, should the public fund ever terminate HSM as its investment adviser, HSM could acquire HSF’s assets (using, for example, capital from HSC or from elsewhere).
Today, we’ve had this fact confirmed, publicly, by Hipgnosis Songs Fund itself.
Within the announcement of its Strategic Review being undertaken, HSF revealed the following:
“The [HSF] Board has asked the Investment Adviser [i.e. HSM] to remove the clause in the Investment Advisory Agreement related to the call option entitling it to acquire the Company’s portfolio on termination of its contract, which the Investment Adviser has declined to accept.”
So there you have it: HSF has officially confirmed to its investors that Merck Mercuriadis and HSM do indeed have an ongoing “call option” to acquire the assets of Hipgnosis Songs Fund should HSF terminate the contract of HSM as its investment adviser.
“[HSM has a] call option entitling it to acquire [HSF’s] portfolio on termination of its contract…”
Hipgnosis Songs Fund confirmation today (October 19)
A “call option”, for those not fluent in finance-speak, is an agreement that sees a potential buyer (in this case HSM) able to acquire assets at a previously-specified price from a potential seller (in this case HSF).
The Hipgnosis Songs Fund board just asked Merck Mercuriadis to give up this clause. He said no.
Mercuriadis’s decision there may have something to do with the fact he (as head of HSM) has already recently agreed to concessions that make it less arduous for HSF to split with HSM as its investment adviser in the future.
Late last month, confirming the resignation of current Hipgnosis Songs Fund Chairman Andrew Sutch, HSF’s board revealed that it had implemented some key amendments within its ‘Investment Advisory Agreement’ (IAA) with HSM.
These amendments give HSM a 12-month notice period as HSF’s investment adviser should the IAA be terminated at any point following next Thursday’s (October 26) scheduled HSF ‘continuation vote’.
In addition, if HSF’s share price stands at an average discount to ‘operative NAV’ of 10% or more across the month of January 2025, the HSF board says it intends to serve notice to terminate the IAA with HSM.
“We continue to believe that HSM is uniquely positioned to deliver value to [HSF] shareholders as a result of our deep relationship with the songwriters that make up the catalogue and our song management expertise.”
Hipgnosis Song Management spokesperson
However, HSF’s board has also given itself the freedom to un-terminate the IAA during the entire notice period that would follow this scenario (e.g. if HSF’s board serves 12-month notice on HSM at the end of January 2025, it would have until the end of January 2026 to withdraw its termination decision).
In its ‘Strategic Review’ announcement today, Hipgnosis Songs Fund’s board said that it had already “considered serving notice on [HSM] to terminate the Investment Advisory Agreement [with HSF]”.
However, it “concluded that it is not currently in shareholders’ interests to do so, as it would be an event of default under [HSF’s] Revolving Credit Facility if the Investment Advisory Agreement terminates in circumstances where a new investment adviser has not been approved by lenders”.
In a statement to media today following the ‘Strategic Review’ announcement from Hipgnosis Songs Fund, a spokesperson for Hipgnosis Song Management said: “‘We fully recognise that the [HSF] Board needs to act as they see fit.
“We continue to believe that HSM is uniquely positioned to deliver value to [HSF] shareholders as a result of our deep relationship with the songwriters that make up the catalogue and our song management expertise. We intend to continue to demonstrate this through our actions.”
Next Thursday (October 26), at two crucial meetings, Hipgnosis Songs Fund shareholders are expected to vote on a pair of key decisions:
- (i) A ‘continuation vote’ as to whether to keep Hipgnosis Songs Fund a UK-listed company in its present form; and
- (ii) Whether or not to accept or reject a proposed $440 million offer from Hipgnosis Songs Capital (via Hipgnosis Song Management) to acquire a portion of HSF’s portfolio.
Hipgnosis Songs Fund’s board today recommended, while announcing its Strategic Review, that shareholders vote in favor of the ‘continuation vote’, suggesting it was “in shareholders’ interest to have a Strategic Review with the widest array of options for the Company to consider and to identify changes that will focus on recovering and delivering improved shareholder value”.
Others take a different view.
Activist HSF shareholder, Asset Value Investors (AVI), earlier this week encouraged fellow HSF shareholders to vote against next week’s ‘continuation vote’. It’s a suggestion that has since been whipped up and expanded upon by various segments of the UK financial press.
This morning, for example, The Telegraph’s business pages ran an op/ed encouraging HSF shareholders to “vote for change”, summing up its view of HSF under the headline: ‘A collection of excellent assets trapped inside a poorly managed fund.’
That’s a headline that some will see as calling into question Hipgnosis Song Management’s competence as an investment adviser.
What it chooses not to acknowledge, of course, is that it was actually HSM – i.e. Merck Mercuriadis – who acquired that “collection of excellent assets” for Hipgnosis Songs Fund in the first place.Music Business Worldwide