The deal announced by Hipgnosis Songs Fund Limited (LSE:SONG) to sell a portfolio of music rights to Blackstone Group offers shareholders a potential "messy, complex and protracted process" if they don't want to agree to it.
That's the view of analyst Sachin Saggar at Stifel who also took issue with the price that the company has agreed.
In a note reviewing the proposed disposal of 29 music catalogues announced by the investment trust last week, where Hipgnosis announced that the gross sale price will be US$440 million, the analyst said he did not think the price materially undervalues the assets.
However, he said "the issue is that the price (adjusted for expenses etc) is -26% below the previous portfolio fair value.
"This is a material difference compared with a valuation that the board and manager have robustly defended for the past few years".
Stifel estimates that the headline fair value of the portfolio of 29 catalogues is US$530 million and its base case for the true sales price after expenses is US$393 million, based on settlements with the Copyright Royalty Board, contingent bonuses, right-to-income agreements, transition fees and tax.
As the continuation vote and asset disposal are conditional upon each other, the analyst said shareholders have two options: vote for both or vote against both.
"For those that like the deal, the solution is straight forward. However, voting against could well lead to a messy, complex and protracted process that will only serve to reduce the ultimate value realised from the portfolio," said Saggar.
A new NAV will have to be calculated to reflect the discount of the Blackstone bid, "and in this scenario the fund would exceed its 30% of operative NAV debt limit", he said, which he suggested could potentially put it within touching distance of the debt covenant "and risk a dividend suspension to preserve liquidity".
Another scenario, the analyst suggested, is that shareholders unsatisfied with the deal vote for the disposal to de-lever the debt and benefit from share buybacks, but vote against the board.
"Options to terminate the management agreement could then be explored. This would give unhappy shareholders a route to replace the board and adviser, with a view to providing full transparency over the portfolio and contingent liabilities.
"Asset sales can be conducted in due course on terms dictated by shareholders and not other stakeholders, to maximise value over the medium term."