Shareholders in UK-listed Hipgnosis Songs Fund (HSF) have overwhelmingly voted in favor of paying companies who make credible acquisition bids for the firm’s catalog a one-off incentive fee of up to £20 million.

Some 99.9% of HSF shareholders today (February 7) approved a proposal put forward by the company’s board for the ‘bung’ payment.

This could result in multiple companies each being paid a ‘bung’ of up to £20 million by HSF’. The initial announcement of the ‘bung’ proposal from HSF’s board (on January 23) confirmed that, if approved, a £20 million fee would be paid to “any prospective bidder(s) who approaches the Board seeking to make an acquisition of the assets of the Company on terms recommendable by the Board to shareholders”.

The £20 million bung proposal, according to the HSF board, was created for one primary reason: so that would-be bidders for HSF’s catalog aren’t put off from making a bid due to the infamous ‘call option’ held by HSF’s current investment adviser, Hipgnosis Song Management (HSM).

Said ‘call option’ decrees that, should HSM ever be fired as HSF’s investment adviser – either by the current HSF board, or by a new owner of the company – a clause would be triggered that enables HSM to acquire HSF for a pre-set sum.

That pre-set sum would be the higher of: (i) Hipgnosis Songs Fund’s public market capitalization; (ii) Hipgnosis Songs Fund’s ‘fair value’ as adjudicated by an independent valuer; or (iii) The price that a separate and credible third-party is willing to pay to acquire HSF (i.e. a matching right).

As regular MBW readers will know, HSM is majority-owned by Blackstone, and was founded by Merck Mercuriadis. (Since last week, Mercuriadis has become HSM’s Chairman; he has been succeeded as HSM’s CEO by Ben Katovsky, formerly HSM’s President and COO.)

It’s a fair assumption, then, that the now-approved £20 million ‘bung’ provision exists as an inducement for companies who are interested in buying HSF’s portfolio (or part of it), but who are dissuaded from making a bid due to the threat of HSM’s ‘call option’.

Here’s a hypothetical scenario of why one such company may be put off:

  1. Company A buys HSF portfolio for $3 billion;
  2. Company A sacks Hipgnosis Song Management (HSM) as investment adviser;
  3. HSM uses its ‘call option’ to acquire HSF from Company A for $3 billion using the matching right;
  4. Company A is left without the HSF portfolio, but on the hook for the cost of the initial acquisition process, including its associated legal fees.

Speaking today about the HSF board’s success in getting the £20 million ‘bung’ over the line, HSF Chairman, Rob Naylor, said: “The [HSF] Board would like to thank shareholders for their continuing support, as evidenced by 99.9% of votes cast in favour of the amendment to the articles.

“The Board remains focused on the strategic review, under which it is looking at all options to deliver shareholder value. The Board will update shareholders as to the outcome of due diligence in due course.”

Hipgnosis Songs Fund is currently undergoing a strategic review, led by Shot Tower Capital.

Amongst other things, this review will consider the current independent valuation of HSF’s portfolio that is currently used to determine HSF’s Net Asset Value (NAV). (Said independent valuation is currently carried out exclusively by Citrin Cooperman.)

Adding intrigue to this story: Last month, Hipgnosis Song Management made an offer to permanently rescind its ‘call option’, in exchange for a multi-year guarantee that it would continue as HSF’s investment adviser.

Said HSM in a statement on January 19: “In order to remove any confusion, Hipgnosis Song Management confirms that it verbally communicated to the Board in December 2023 it was willing to concede [its] Call Option as part of a negotiation for a new multi-year Investment Advisory Agreement.

“This was formalised in a written proposal that was delivered to the Board on 16 January 2024 and re-affirmed in further written correspondence on 17 January 2024.

“This position reflects Hipgnosis Songs Management’s desire to remain the Investment Adviser to the Company and work constructively and collaboratively with the Board to maximise shareholder value.”

Rob Naylor and his board at HSF subsequently publicly dismissed this offer from HSM (as indicated in the all-important word “unconditionally”) via the following statement from HSF, issued on January 23:

“The Newly Constituted Board has requested for the Investment Adviser, Hipgnosis Songs Management, which is majority owned by funds managed and/or advised by Blackstone, to unconditionally remove the Call Option from its Investment Advisory Agreement with immediate effect to act in the best interests of shareholders as a whole. This request has been refused.”

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