The troubled music royalty company Hipgnosis Songs Fund (HSF) has agreed to a $1.402 billion takeover bid from Nashville-based rival Concord, according to a letter of intent filed Thursday (April 18) with the London Stock Exchange.
While the board and institutional investors representing 30% of the fund’s outstanding shares say they will vote in favor of the Concord bid, the deal still needs shareholder approval from investors holding a total of 75% of shares. The bid could also trigger competing bids from other interested parties — meaning the deal is far from done.
The proposed deal values each Hipgnosis share at £0.93 ($1.14), a premium of roughly one third the fund’s closing shareprice on Wednesday. Hipgnosis Songs Fund’s assets include stakes in songs performed by Neil Young, Journey, Lindsey Buckingham and Blondie, among others.
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“The board is pleased to announce and unanimously recommend this US$1.4 billion offer for Hipgnosis from Concord,” Robert Naylor, chairman of Hipgnosis, said in a statement. The acquisition “represents an attractive opportunity for our shareholders to immediately realize their holding at a premium, mitigating the risks we see ahead to achieving a material improvement in the share price.”
The announcement comes roughly six months after shareholders rejected an offer to sell a chunk of its song catalog, before shareholders subsequently voted no to continuation — the equivalent of a vote of no confidence in the 5-year-old fund’s previous board and its investment advisor, Hipgnosis Song Management.
In the intervening months, the board of directors has been almost entirely reconstituted by Naylor, who became chairman last November, and Hipgnosis’ founder, the former manager of artists like Elton John, Beyoncé and Guns N’ Roses, Merck Mercuriadis stepped down from his role as chief executive officer of Hipgnosis Song Management in February. Mercuriadis remains as chairman of the latter company, HSM.
The deal is expected to close in the third quarter. Before then, a shareholder meeting will be held June 10 to vote on approval of the bid; prior to that date, competing bids could still come in. Should the proposed deal close, Concord will own 80% of the Hipgnosis assets, with Apollo Global Management owning 20%. Apollo is expected to play a role in restructuring the HSF debt, which currently totals $660 million net, giving Hipgnosis Sungs Fund an enterprise valuation of about $2.06 billion for the deal.
Last month, the fund’s board cut the value of its portfolio by more than a quarter and told investors that it does not intend to recommence paying dividends “for the foreseeable future” as it focuses on paying down debts. It also released the findings of a report compiled by lead independent adviser, Shot Tower Capital, the report found that Hipgnosis Song Management had materially overstated the fund’s revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) and supported catalog acquisitions with financial analysis that failed to meet “music industry standards.”
The report found that Hipgnosis Songs Fund itself exaggerated the scope of its music assets in investor disclosures and once, related to the first failed bid to sell 29 catalogs to sister Hipgnosis company, Hipgnosis Songs Capital, the fund presented to shareholders a better-than-could-be-expected post-deal valuation.
Should Concord succeed in acquiring Hipgnosis Songs Fund’s portfolio of assets, it plans to take over management from the current investment adviser Hipgnosis Song Management, which is majority owned by private equity giant Blackstone. HSM also serves as the investment adviser to Hipgnosis Songs Capital, a separate fund Blackstone backs that has also amassed $700 to $800 million worth of music rights.
As part of working toward closing the deal, HSF has to terminate HSM’s role as the investment advisor, which would require 12 months written notice, a fee equal to one-year of services and at the end of that year, Hipgnosis Song Managment can exercise a call option to buy the portfolio’s assets by outbidding any competing offer, according to previous filings.
On Thursday, the fund and Concord said if they are not able to reach an agreement with Hipgnosis Song Management to terminate its contract, shareholders will get an additional $25 million “less any amount payable to the investment adviser under the … Termination Agreement,” effectively covering the cost of Hipgnosis Song Management’s termination fee. If some agreement is reached, the amount could potentially be paid out directly to shareholders.
The fund’s board and Concord did not address Hipgnosis Song Management’s call option in the filing. But in the letter of intent filed Thursday, it stated that the 30% of shares pledged to support Concord’s bid would cease to be binding if “a competing offer … is announced (representing) a value per Hipgnosis Share of not less than 10 per cent above the maximum value of the offer price of US$1.18 per Scheme Share.”
The Hipgnosis board, Naylor continues, is confident that Concord is the “right owner” to take on the Hipgnosis catalogue and manage it in the interests of composers and performers.
“We believe we are offering a fair price for Hipgnosis’ catalogues and music assets, giving its shareholders the opportunity to realize their investment at a significant premium to the prevailing share price in cash,” Concord CEO Bob Valentine said in the filing. The company said it views Hipgnosis’ assets as complementary to music rights in its own portfolio and “creators connected to the rights acquired will benefit from the services of Concord’s existing creative and administrative support teams globally.”
Concord said, by way of showing its bona fides, that it has completed more than 100 transactions across recorded music, music publishing and theatricals, in a $2.8 billion spending spree since 2015.
Singer Capital Markets and Shot Tower Capital acted as, respectively financial adviser and corporate broker; and valuer and strategic advisor, to Hipgnosis; Reed Smith acted as legal advisor to Concord and Bidco (Concord/Apollo).
Additional reporting was provided by Ed Christman.