The Hipgnosis Songs Fund Limited (LSE:SONG) board has proposed changing the articles of the company so that a fee of up to £20 million would be paid at the board's discretion to any prospective bidders seeking to acquire the company's assets on agreeable terms.
A circular will be sent to shareholders to propose a special resolution to amend the articles following the wholesale reconstitution of the board after shareholders blocked a proposed £440 million asset sale last autumn.
The board, which is still carrying out a strategic review, said it was suggesting the payment of a fee following a "substantial investor consultation exercise" with investors holding more than 60% of the shares, which revealed concern around the 'call option' that gives investment adviser Hipgnosis Song Management (HSM, majority owned by Blackstone) the right to purchase the portfolio if and when the trust was to terminate its advisory agreement.
"Shareholders have told the board that the call option constitutes a material conflict of interest for the investment adviser and acts as a significant deterrent to any third-party potential offerors who might seek to acquire the company or its assets," the statement said, adding that the option depresses the potential value of the company by limiting possible opportunities for shareholder value creation.
Consultations over the £20 million payment proposal with the fund's largest shareholders, which together hold over 35% of the shares, found all supported the idea.
Broker Stifel said it "appears a smart move" from a board that has started to show its teeth, although the timing is "slightly odd".
Envisioning a possible scenario where HSM is terminated and the call option is triggered, "you do not want third-party bidders assuming that the sale to Blackstone is a foregone conclusion such that they make no attempt to bid for the assets," said analyst Sachin Saggar, noting that this was an element of the flawed process for previously planned £440 million disposal.
"What a payment does is ensure that there will be some competition for the assets that may lead to a sale above a 'real' NAV in any future bidding scenario."
On the timing, the analyst said the amendments will in effect "remove the call option".
He said that HSM will be "weighing up what it values more. Does it wish to be the IA to the listed fund or does it think there is more value in the call option".
If the article amendment is made now, Saggar said, "it sows the seeds at HSM that the call option may not be the more value-accretive route for it all else being equal.
"Overall, it puts more pressure on it to come to the table."
But overall, the analyst said he and colleagues think the probability of a bid today is "low" and these changes are "an attempt to address the balance of control between the board and HSM".