In a stock exchange notice on Thursday (14 September), the trust said it had agreed to sell 29 catalogues for $465m to Hipgnosis Songs Capital, the Blackstone-backed private fund managed by SONG investment adviser Hipgnosis Song Management.
Using the proceeds from the catalogue sales, the board also outlined a share buyback programme of up to $180m and the repayment of $250m drawn under the trust's revolving credit facility, as well the introduction of additional, lower investment advisory fee tiers.
Hipgnosis agrees $465m catalogue sale from public trust to private Blackstone vehicle
The move comes more than two months after the board first revealed it had been considering strategic options to re-rate the trust's share price ahead of its five-year continuation vote, which is set to take place over the coming month.
SONG had been facing additional pressure to deliver a compelling offer to shareholders this week after Round Hill Music Royalty fund (RHM), its closest peer, announced it had agreed to a $468.8m takeover offer by Concord.
The response to the proposals from shareholders has so far been lukewarm, with the trust's share price up less than 0.3%, according to data from Morningstar Direct. SONG's discount has widened to almost 38% after narrowing to a twelve-month low of 36% on Monday (11 September).
A nuanced 'positive step'
Given shareholders and analysts had been calling for Hipgnosis to implement these measures, Matthew Read, senior analyst at QuotedData, told Investment Week the details provided are "certainly a positive step".
However, he said it would have been beneficial to shareholders to see a third-party offer for these assets, as that would also have given greater credibility to the NAV calculation and discount rates.
"Unfortunately, this does not seem to have been explored, although it is perhaps not a surprise that Blackstone wants to keep control of these assets," he added.
Hipgnosis Songs considers strategic options ahead of September continuation vote
According to the FT, Blackstone paid an unknown sum for the majority of Hipgnosis Song Management to the manager's founder and CEO Merck Mercuriadis in 2021, and promised to give the firm $1bn so he could create a private fund for the manager.
In a research note, Winterflood said that if reinforcing investor confidence in portfolio valuations is the aim, a related party transaction is "rarely the solution", while Ewan Lovett-Turner, analyst at Numis, said a related-party transaction will "make some investors uncomfortable" and lead to "increased scrutiny" on pricing.
The music catalogue sale represents an 18.3x NPS multiple, a 26% premium to the acquisition price, a 51% premium to the implied market valuation, but also a 17.5% discount to fair value as at 31 March 2023.
QuotedData's Read argued the purchase price "looks cheap" when compared to Concord's purchase of Round Hill Music, which came at a discount of 11.5% to the economic, or fair value, NAV per share of $1.30 as at 8 September.
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SONG described the proposed transaction as the "smallest magnitude possible" to enable execution of its re-rating strategy, with the overall strategy still focused on buying, holding and actively managing the portfolio.
It also said the sale will leave a remaining portfolio of older vintages, which investors have tended to favour due to more stable cash flows, and generating a significantly higher income per song.
However, Lovett-Turner said investors will now be looking in detail at the exact songs that are being sold to draw comfort that the "crown jewels" are not being sold.
"In addition, we expect that investors will be concerned about what the impact of this transaction will be on the valuation of the rest of the portfolio," he said.
'A fine margin'
With SONG's five-year continuation vote set to take place no later than 25 October, analysts and shareholders have weighed in on the prospects for continuation, with Winterflood arguing votes could be split by a "relatively fine margin".
Hipgnosis Songs Capital was always "the most likely suitor" for the portfolio compiled by its manager, the broker argued, while noting this might suit shareholders of the listed vehicle "just fine" in the event of a take-private deal.
However, in the absence of a comprehensive cash offer, Winterflood said it would seem that an external offer close to NAV would be the "strongest argument" in favour of continuation at the AGM, even if this is subsequently matched by the private fund.
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"Hence the creative structure of this deal, which de facto puts a floor under the valuation of these catalogues and attempts to create a market ahead of the AGM," it added.
"The question remains whether the combined impact of this transaction and a buyback equivalent to c.16% of market cap will convince shareholders to support continuation; in the absence of further developments we would not be surprised to see votes split by a relatively fine margin."
Meanwhile, Lovett-Turner said that while a partial sale with the prospects of buybacks may offer some value over the long-term, he expects investors will have "many questions" about the transaction. Moreover, with the prospect of a full takeover less likely, he argued the discount "may persist for some time".
"There also may need to be significant rotation in the shareholder register to remove any investors who have become less comfortable with the asset class. As a result, we expect this may mean the board/manager will continue to come under pressure," he added.
Jefferies: Potential Hipgnosis Songs bidders may be dissuaded by number of impediments
Losing the continuation vote could bring a number of issues, including SONG giving the impression of it being a forced seller in the event of having to offload its portfolio, QuotedData's Read argued, which would not enhance its negotiating position with potentially interested parties.
Pietro Nicholls, portfolio manager of the VT RM Alternative Income fund, which sold off its holdings in both SONG and RHM last week, noted this year's "considerable" shareholder activism and engagement across the investment trust sector.
"It is likely this will continue, especially if discounts appear driven by more than just changes in interest rates/expectations. The board will be acutely aware of this, and will no doubt be canvassing views from a cross section of the shareholder register," he added.