Yahoo Finance Questor: Hold on to embattled pop music investment fund as bid battle hots up
Shareholders in Hipgnosis Songs may not yet be singing Sweet Dreams Are Made Of This but an emerging bid battle for the troubled royalties fund has at least restored the shares to their original launch price six years ago.
The specialist investment company, which holds the rights to the Eurythmics hit along with 65,000 other songs, has soared 42pc, or 31p, to 101p in the past week after its board received two offers for the dollar-based portfolio.
For a fund named after the design company responsible for iconic album covers from 1970s rock giants Pink Floyd and Led Zeppelin, among others, this looks a much better picture. Shares that peaked at 129p in late 2021 and plunged to 58p in early March have rallied 71pc since then.
Speculation of a bid had mounted as Hipgnosis assessed its options following a shareholder revolt last October when investors voted against the fund’s continuation.
Last Thursday, Concord, a music rights group based in Nashville, Tennessee, announced it had the board’s recommendation to buy the company for $1.4bn (£1.1bn) in cash, or $1.16 (94p) per share.
Backed with finance from Apollo Global Management in New York, Concord agreed to pay 4.3pc more than the value of Hipgnosis’ assets, which include songs from Blondie, Kaiser Chiefs and Red Hot Chilli Peppers.
This small premium follows the fund’s valuation being slashed by 26pc last month after a devastating report by Shot Tower Capital. The valuer questioned the competence of fund manager Hipgnosis Song Management (HSM) and concluded its founder Merck Mercuriadis had overpaid for its 146 song catalogues in a £1.3bn acquisition spree.
Concord’s coup stunned Blackstone, the US alternative assets group that is the majority investor in HSM. It, along with other potential bidders including music label BMG, had been discussing an offer with the board.
Last weekend it rushed out a statement saying it was prepared to pay 7pc more in cash than Concord at $1.24 (£1) per share, valuing the company at $1.5bn (£1.2bn). It is expected to formalise the counterbid next week which Hipgnosis has said it would be “minded” to recommend to shareholders.
All this is great news for investors who had seen shares we first tipped five years ago sink on concerns over the company’s debts, the scrapping of the dividend, and worsening relations between HSM and the board. The shares have risen 58pc since 6 March when we advised investors to hold on after the valuation write-down.
Shareholders can thank the fund’s recently appointed chairman Robert Naylor for the revival. Naylor was appointed last November having obtained a 65pc gain for shareholders in Round Hill Music Royalty fund, where he was also chairman, selling the company to Concord for $470m.
Naylor has cleverly repeated the trick. One source said he had contacted Concord again about replacing HSM as fund manager, but talks had quickly moved to Concord making a bid instead. Concord initially offered $1 a share but had to improve its bid by 16pc.
Whether this turns into a full-scale bidding contest depends on how high Concord is prepared to go if Blackstone finalises its bid, and whether it has the stomach for a lengthy legal fight.
Blackstone and HSM have warned Concord they will defend HSM’s contractual right to buy the portfolio for six months if the fund manager is sacked. Given this includes a potential 12-month notice period, it creates an 18-month period of uncertainty for any bidder.
Naylor and the board could dismiss HSM for breach of contract based on the Shot report, which would cancel HSM’s option to buy. However, HSM and Blackstone insisted there are no legal grounds for the fund manager to be sacked and said they would “vigorously defend” their position.
Blackstone says it bid for Hipgnosis not because it thought HSM’s right to buy was weak but because it wanted to avoid a delay.
Supporters of Concord, who include fund managers holding over 23pc of Hipgnosis shares, think Blackstone and HSM are bluffing. Either way, with the shares just above Blackstone’s bid, investors should hold on for developments.
The price may not rise much further but the offers underline the fact that the fund does contain valuable investments.
Questor says hold.
Ticker: SONG
Share price at close: 101p
Gavin Lumsden is editor of Citywire’s Investment Trust Insider website
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