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Hipgnosis Songs Fund, the troubled UK-listed investment group that buys the rights to music, has launched a strategic review that will look at options including changing its adviser or even a sale of the company as it approaches a crunch vote over its future.
Hipgnosis is fighting to win shareholder approval for its continuation as an investment trust for a further five years at a vote next week. Investors have long been dissatisfied with the share price of the group, which is trading at a significant discount to its net asset value.
The company was founded by former band manager Merck Mercuriadis in 2018 with a plan to turn music rights into a mainstream asset class, using the royalties from streaming, radio play and performances to provide a steady source of income for investors. However, royalties have become comparatively less attractive than other asset classes such as bonds given the rise in interest rates. Debt costs have also increased as interest rates have risen.
Some investors have objected to the price being offered for a $440mn music rights portfolio sale to a private sister fund owned by Blackstone in an attempt to tackle the large discount. Hipgnosis further tested investor patience this week when it axed its dividend after warning over a potential breach in covenants.
On Thursday Hipgnosis, which is overseen by an independent board of directors, said it was considering options “with the aim of maximising value for shareholders”.
The board said it had considered serving notice on the investment adviser — named Hipgnosis Song Management, which is part-owned by Blackstone and overseen by Mercuriadis — to terminate its agreement, but had concluded the move would not be in shareholders’ interests given it would lead to a default of its debt facility.
However, a person close to the company said the review would look at options such as this among others, albeit with any change in the investment manager needing lender approval. The review might also conclude that the management company is the best option for the future, they added.
The board and its investment adviser have already clashed over a request to change the terms of the management agreement that would allow Hipgnosis Song Management to buy the company’s portfolio on termination of its contract. Hipgnosis Songs Fund said the manager had turned down a proposal to change this arrangement.
It also said on Thursday that its lenders had now agreed to changes to its revolving credit facility that would mean it was again compliant with a fixed charge cover ratio covenant. The London-listed group had said on Monday that the income from its US song catalogue had fallen short of expectations, threatening covenants.
In a statement, the board said it continued “to recommend voting in favour of the continuation resolution, believing it is in shareholders’ interest to have a strategic review with the widest array of options for the company to consider and to identify changes that will focus on recovering and delivering improved shareholder value”.
An Hipgnosis Song Management spokesperson said: “We continue to believe that HSM is uniquely positioned to deliver value to shareholders as a result of our deep relationship with the songwriters that make up the catalogue and our song management expertise. We intend to continue to demonstrate this through our actions.”
Tom Treanor, executive director of Asset Value Investors, a top 10 shareholder, described the new review as “desperate stuff and changes nothing in terms of how we intend to vote”.
Treanor plans to vote against the company’s continuation resolution, but is also opposed to an immediate sale of the portfolio or the initiation of a wind-up process.
He said: “I can’t think of anyone worse qualified to hold a strategic review than this board. The deal remains terrible and voting for it would still set an awful precedent for future asset sales.”
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