As dawn broke over the City Of London this morning, and against the background hum of Bishopsgate, commuters were surprised to hear the unmistakable sounds of a full throated woman warming up her voice. The fat lady was practising her scales.
Around the same time, news broke that Hipgnosis Songs Fund, the London Stock Exchange-listed song rights investment fund, had announced that it would be advising shareholders to accept an offer of $1.16 per share from Alchemy Copyrights LLC via its subsidiary Concord Chorus Limited. Privately-owned music acquisition giant Concord has set its sights on SONG - and by all indications will get it.
Concord has irrevocable undertakings from shareholders backing its offer
This is in no small part due to the fact that Concord has obtained irrevocable undertakings committing 285.2 million shares to its offer, with letters of intent relating to a further 70 million. 327,796 of these shares come from directors of Hipgnosis Songs Fund - 0.03% of the fund's total issued shares - meaning that the total percentage of the issued shares irrevocably committed to the Concord deal comes to 23.56%. If you include the letter of intent for the further 70 million shares - controlled by Investec - this brings the total commitment to 355,245,437 share or 29.38% of the issued share capital.
In March SONG had announced that its Operative NAV per share had been marked down to $1.0765 (then 85.03p) from $1.1657 (92.08p) “following identification of an error due to the double counting of accrued revenue”. This was part of Shot Tower Capital’s due diligence investigation, which followed months of high drama name calling between SONG and its investment adviser, Hipgnosis Song Management, the Merck Mercuriadis-helmed company that manages the rights acquired by SONG.
Extremely high trading volumes after announcement
By the time the markets closed today more than 174 million shares in Hipgnosis had changed hands as investors took advantage of the announcement to offload their shares - a 100x increase on yesterday’s trading volume of 1.7 million shares, and is nearly double the total number of shares traded in the last month - 97.4 million. More than 3.3 million of those trades happened by 8.05am, which compares to the last month’s daily average trading volume of 4.7 million, according to data from AIC.
With the market price remaining stable around the offer price this suggests that there was significant pent up demand from frustrated investors looking to ditch their Hipgnosis shares - but also that there is support from the market at the offer price, with arbitrage traders willing to buy shares just under the offer price betting on the expectation that when the deal goes through they will be able to collect a small premium.
The "FO clause"...
In fact, that bet may be one worth taking. The Concord offer has a sting in the tail in the shape of a $25 million “contingent consideration”. Under the terms of this clause, shareholders stand to get an additional $25 million between them, or around $0.02 per share if - and only if - Hipgnosis Song Management enters into a “tripartite agreement” with SONG including its subsidiaries, and Concord to “terminate the Investment Advisory Agreement”.
Already dubbed by some City commentators as the “FO clause” this seeks to ensure an “elegant exit” of HSM from the equation, tidying up one of the key points of contention in the Hipgnosis saga.
A statement from SONG in its 19 Oct statement initiating the “strategic review” set out the process for terminating its agreement with HSM.
“The Investment Advisory Agreement can be terminated, other than for cause, by the company on not less than twelve months' notice, with an additional one-time termination fee equal to one year's advisory fee calculated on NAV as at the termination date”, it said. That advisory fee is 1.21% - which, curiously enough is almost exactly £20 million, or $25 million US dollars at current rates. Those who have been following the Hipgnosis drama over recent months will also note that this is the same amount as the “bung” offered by HSF to potential acquirers.
Is this just a way of avoiding paying HSM $25 million?
So have Concord and SONG cooked up a way to avoid paying HSM a termination fee, by using the bung to fund things? Sources say no. However, the proposal that HSM should agree to exit - or else shareholders don’t get another $25 million - can be seen as a strong arm tactic: leave quietly, or we’ll ask you to leave.
What’s remarkable about this part of the proposal is that it begs the question why HSM would agree to these terms when it could simply accept a standard twelve month notice period on its advisory agreement, and walk away with around £20 million for its trouble? Plus, given the complexities around handing off music rights from one manager to another, is there not a benefit to HSM serving out that twelve month notice period and ensuring an amicable transfer of undertakings during that period?
SONG’s current chair, Rob Naylor, who previously sold his Round Hill Music Fund to Concord - and so presumably has both close and good relationships with the potential new owner of SONG - has been accused by some city commentators of being “out to get” Merck Mercuriadis. At the same time, all parties are presumably keen to avoid a long and costly legal battle, which would only serve to bring yet more attention to the Hipgnosis drama.
Is this really such a good deal?
Back to the price offered: some in the City have pointed out that although in today’s money the deal looks fair - on par with the most recent NAV - the current economic climate and backstop for the deal of November means that, with US interest rates high, and UK rates perhaps set to come down, there’s a potential currency risk as the dollar strengthens against the pound. Over the same period it’s possible - though, perhaps not likely, given the current state of affairs at HSF, that the fund’s NAV could rise over the same period.
As things stand - bar a last minute bid from HSM-associated Blackstone - it seems likely that the deal with Concord will go through. Whether that involves a messy legal undertaking as SONG and HSM conclude their acrimonious divorce only time will tell.
One thing’s for certain: it’s ain’t over till the fat lady sings, and that could still be some time.