Hipgnosis Songs Fund’s board of directors levied two complaints at its investment advisor, the Merck Mercuriadis-led Hipgnosis Song Management, on Tuesday (Jan. 23) that call into question the company’s ability to field competitive bids for its assets.
Shareholders have told Hipgnosis Songs Fund’s newly constituted board they believe the investment advisor’s call option — a right to purchase the company’s catalogs if its contract is terminated with less than 12 months’ notice, among other scenarios — harms the fund’s ability to receive competitive bids. Those concerns led shareholders to reject Hipgnosis Songs Capital’s proposal to acquire 29 catalogs for $440 million to help the public fund reduce its debt and improve its share price. Hipgnosis Songs Capital is a joint venture of the investment advisor and financial backer Blackstone.
Another problem cited by the board was Hipgnosis Songs Capital’s right to match competing offers to its $440 million bid. This matching right “acted as a deterrent for credible third-party buyers committing to incur the costs of due diligence,” the board stated on Tuesday.
To lure more bids, the board wants to make the bidding process more attractive financially. On January 18, the board announced a proposal to pay prospective bidders a 20-million-pound ($25.4 million) fee to cover due diligence and acquisition costs when they pursue a purchase of Hipgnosis Songs Fund’s music assets, including songs by Neil Young, Shakira, Journey and Red Hot Chili Peppers, among many others. Shareholders will vote Feb. 7 on a resolution to amend the articles of the company to allow for the 20-million-pound fee.
The call option remains a sticking point, though. In a regulatory filing on Tuesday, the board announced that the Blackstone-backed investment advisor has refused to “unconditionally” remove the call option from the investment advisory agreement “to act in the best interest of shareholders as a whole.” Mercuriadis would be willing to drop the call option, according to the Financial Times, if he can remain investment manager in a multi-year contract. The investment advisor’s call option also applies if the company is wound up or liquidated, or if the company’s investment objective undergoes a “material change” and the investment advisor cannot meet the obligations of its investment advisor agreement.
The board leveled another complaint against the investment advisor on Tuesday. The proposed sale’s 29 catalogs were “growing at materially higher rates to the overall portfolio” and were “cherry picked” for sale to Hipgnosis Songs Capital, according to two independent research reports. The board is investigating the veracity of the claims and whether the previous board was provided this information by Hipgnosis Songs Capital. Although the board did not name either party behind the research reports, it hired Shot Tower Capital, an investment banking firm active in music catalog transactions, in December to help with its strategic review.
Hipgnosis Songs Fund shares declined 1.5% to 0.711 pounds ($0.90) on Tuesday.