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Hipgnosis Songs Fund (HSF), the UK-listed music rights fund, appears prone to maintain its all-important 2023 ‘continuation vote’ on Thursday, October 26, in response to an announcement from the agency at the moment.
Why’s that ‘possible’ moderately than ‘positively’? As a result of there’s nonetheless a chance it’d get ran into November – the explanations for which we’ll get into later on this article.
The ‘continuation vote’ will happen at HSF’s Annual Common Assembly (AGM), and can see the agency’s shareholders vote on whether or not to maintain the entity going as a closed-ended funding entity i.e. a publicly-traded bundle of music rights.
How will that vote go? Clearly we don’t know but – and there’s the small matter of a $440 million transaction looming that would probably affect issues.
Even so: one wonders if some new modifications at HSF, introduced at the moment, are associated to this ‘continuation vote’ – and whether or not or not they quantity to concessions to assist hold HSF buyers blissful and assured within the agency’s long-term prospects… and voting ‘sure, let’s hold going’.
The shareholder frustration: NAV vs. public market
First, a little bit of necessary context.
The elemental income efficiency of HSF doesn’t appear to be beneath scrutiny from shareholders: the corporate posted its best-ever revenues within the 12 months to finish of March, whereas streaming ‘pro-forma’ revenue was up 14.8% YoY in calendar 2022.
The place HSF shareholders – in addition to its administration – are discovering frustration is within the present gulf between the agency’s ‘operative Internet Asset Worth’ (‘operative NAV’) and its worth on the general public market (i.e. its share worth).
For instance: On September 14, HSF’s market cap stood at roughly GBP £1.125 billion, which represented a 40% low cost on the agency’s operative NAV of £1.873 billion as of the top of March this yr.
(Mentioned ‘operative NAV’ was calculated by an impartial valuer – Citrin Cooperman – utilizing a reduction fee of 8.5%.)
That is the place the significance of that potential $440 million transaction is available in.
As MBW reported earlier this month, Hipgnosis Songs Fund’s shareholders are at present contemplating a proposal to promote 29 of the corporate’s catalogs to one other Hipgnosis firm – the Blackstone-backed Hipgnosis Songs Capital (HSC) – for USD $440 million.
That potential transaction is being managed for each HSF and HSC by two separate groups inside their mutual funding advisor, Hipgnosis Music Administration (HSM), which is run and part-owned by Merck Mercuriadis.
When it introduced its intention to discover the $440 million catalog sale to HSC two weeks ago, Hipgnosis Songs Fund confirmed that one in every of its motivating elements was that the transaction might probably act “as a catalyst for a re-rating of [HSF’s] share worth”.
Aka: Growing that share worth to carry it up nearer to the present operative NAV of the corporate.
HSC’s $440 million provide to amass the 29 catalogs, HSF confirmed earlier this month, equates to a 26% improve on the quantity HSF paid for these catalogs to amass them prior to now.
The $440 million worth additionally displays a +51% premium on the worth of the 29 catalogs implied by Hipgnosis Songs Fund’s public market cap for the 30 days ending September 13.
What occurred at the moment?
Amongst the information confirmed by HSF at the moment (September 28) is that the agency’s Chair of its board since 2018, Andrew Sutch, 73, is stepping down, each as HSF board Chair and as a director of the corporate.
HSF says it’s begun a course of to recruit a brand new Chair; Sutch (pictured inset) will depart his put up as and when this particular person is employed, or in any case earlier than HSF’s AGM subsequent yr (in This autumn 2024).
As well as, Andrew Wilkinson, 72, has knowledgeable the HSF board of his intention to retire as a board director, which is able to cut back the corporate’s board to 5 administrators.
HSF additionally confirmed various different new measures in a ‘round’ to its shareholders at the moment.
These measures included the truth that, if Hipgnosis Songs Fund shareholders vote to stay a publicly-traded fund (by way of that 2023 ‘continuation vote’) on the agency’s subsequent AGM, then one other ‘continuation vote’ will probably be put in entrance of HSF shareholders at an Extraordinary Common Assembly in January 2026.
(The ‘continuation vote’ that may happen in This autumn 2023 has been scheduled ever since HSF went public in 2018 – i.e. 5 years after it floated. The 2026 ‘Continuation Vote’, as newly-agreed, means one other one is now being scheduled for round two years’ time.)
As well as, HSF at the moment confirmed some new amendments to its ‘Funding Advisory Settlement’ (IAA) with HSM.
These amendments would give HSM a 12-month discover interval as HSF’s funding advisor ought to the IAA be terminated at any level following the upcoming 2023 ‘continuation vote’.
One other clause within the new IAA: If HSF’s share worth stands at a median low cost to ‘operative NAV’ of 10% or extra throughout the month of January 2025 (with that NAV decided on the time of publication of HSF’s interim report for the interval to September 30, 2024), the HSF board says it intends to serve discover to terminate the IAA with HSM.
Nevertheless, HSF’s board has additionally given itself the liberty to un-terminate the IAA throughout the whole discover interval that will observe (e.g. if HSF’s board serves 12-month discover on HSM on the finish of January 2025, it might have till the top of January 2026 to withdraw its termination choice).
One issue probably making the longer term termination of HSM as HSF’s funding advisor much less possible? MBW understands that, in such a state of affairs, HSM would have a first-refusal possibility to amass HSF’s copyright portfolio – and will probably flip to Blackstone (i.e. the backers of Hipgnosis Songs Capital) to seek out the cash to drag off such an acquisition.
Why the $440 million provide is related to the date of HSF’s ‘continuation vote’
Whereas HSF shareholders are contemplating the $440 million provide from HSC to purchase the 29 catalogs, different non-Hipgnosis firms are additionally being invited to make bids for a similar portfolio.
These bids are enabled by a ‘go-shop’ clause within the HSF/HSC proposal that permits the HSF board to think about these non-Hipgnosis approaches for a restricted interval (till 11.59pm on October 23, to be exact).
Right now (September 28), HSF knowledgeable its buyers that “credible third events are already engaged on this go-shop course of” following its announcement on September 14.
As we’ve beforehand reported, there are potential obstacles in the best way of those third events’ bids. These embody the truth that HSM (on behalf of HSC) has a ‘matching proper’, which means that if HSC decides to match the upper bid of a rival, HSF has to promote the catalogs to it – moderately than the rival.
As well as, any ‘superior’ provide must exceed the mixture money web proceeds that will finally attain HSF’s coffers ought to HSC’s $440 million provide be executed. (Learn extra about this situation through here.)
Nonetheless, it’s a theoretical chance {that a} non-Hipgnosis firm swoops for the 29 catalogs from HSF, and gazumps HSC within the bidding course of.
If a ‘superior proposal’ (versus the $440 million provide from HSC) is acquired through the ‘go-shop’ interval, stated HSF at the moment – whether or not or not HSC makes use of its ‘matching proper’ to beat it – it might be essential to adjourn the HSF AGM (and subsequently the 2023 ‘continuation vote’) into November.
In its be aware to shareholders at the moment, the HSF board reiterated its perception – and Hipgnosis Music Administration’s perception – that HSF owns “a singular portfolio of iconic, culturally vital songs that may ship sturdy long-term worth as they profit from the structural tailwinds within the music business”.
The be aware added: “Moreover, the [HSF] Board believes that the Funding Adviser’s strategy to Music Administration ought to allow the Firm to outperform the broader music market. This has been evidenced by the 44% whole return, together with proper to earnings, transaction charges and anticipated taxes, realised since acquisition on the [$440 million] Transaction.
“Moreover, the Board and the Funding Adviser are dedicated to making sure that this worth is achieved for shareholders by a re-rating of the share worth and are decided to ship on the continuing alternative of the Firm.”Music Enterprise Worldwide
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