The board of Hipgnosis Songs Fund (LSE:SONG) launching a strategic review today, including a potential break-up with founder Merck Mercuriadis' management company, is a strange move, analysts said, as the upcoming shareholder vote could quite well precipitate a similar outcome.
Shareholders are due to vote next Thursday, 26 October, on two issues: first, whether to accept a £440 million sale of some portfolios of song rights to Blackstone and the second is a continuation vote on the future of the investment company.
In short, the company said in a statement today that the board mulled ending the contract with its current investment advisor, Hipgnosis Songs Management (HSM), led by founder Merck Mercuriadis, but decided against this course of action, in part as it would trigger a default under the investment trust's bank facility.
HSM, which is majority-owned by Blackstone, also declined a request to remove a clause agreement related to the call option entitling it to acquire the company's portfolio on termination of its contract.
Analysts at Stifel said this latter point "points to Blackstone having the appetite to purchase the assets" but "unless this could be achieved at a materially lower price than NAV, we think the use of the call option is unlikely".
The analysts added: "It is clear to us the relationship between Blackstone and the legacy Hipgnosis team must be strained given that this is rapidly becoming a public spat between all stakeholders."
Nevertheless, it was noted that if influential music rights valuer Citrin Cooperman "continues to produce an inflated NAV, we think investors would be quite happy for Blackstone to purchase the assets anywhere close to the current £1.57 NAV".
The analysts added that obtaining consent from lenders should have been sought before providing commentary.
Two years' worth of fees required to be paid would be around £17 million, Stifel calculated, with the analysts suggesting a shorter termination period could be negotiated by paying more of the fee in cash.
Much of this could be moot, based on the "as investors have such little trust with the existing board, we are not clear how decisions taken by them will have broad support. In practical terms, the strategic review will have to be carried out by their successors."