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UPDATE: Hipgnosis Songs Fund investor backs rejecting continuation

16th Oct 2023 12:34

(Alliance News) - Hipgnosis Songs Fund Ltd was put under further pressure on Monday after a shareholder called on investors to vote against its continuation and a planned disposal.

Asset Value Investors, which manages London-listed AVI Global Trust PLC, believes a "reset" is needed at Hipgnosis. Asset Value Investors manages a 5% stake in Hipgnosis.

HSF shares traded 11% lower at 65.55 pence each in London on Monday afternoon.

Hipgnosis earlier on Monday pulled a previously declared interim dividend, hurting the music intellectual property rights investor's shares further ahead of the key votes on its future.

Hipgnosis said it now expects to receive "significantly lower retroactive payments" of songwriter royalties for 2018 to 2022. Due to the expected decision by the US Copyright Royalty Board for that period, Hipgnosis plans to reduce its retroactive accrual to USD9.9 million from the USD21.7 million it had accrued at the end of March.

To ensure compliance with a covenant of its revolving credit facility, Hipgnosis will withdraw its interim dividend payment. It also will discuss the royalties issue with its lenders.

The decision also comes ahead of the company's annual general meeting in 10 days, which will see shareholders vote on two key motions, a planned disposal and the company's continuation.

In September, Hipgnosis said it is selling off 29 of its music catalogues for USD440 million to help fund a share buyback programme and reduce its debt.

It is selling off the catalogues to Hipgnosis Songs Capital, which is a partnership between HSF's investment adviser Hipgnosis Song Management Ltd and funds advised by New York-based alternative asset manager Blackstone Inc.

The proposals are designed to re-rate its share price and narrow the discount to operative net asset value.

The sale is being done at an 18% discount to the fair value of the assets as at March 31, though HSF said it is a 51% premium to the valuation implied by the firm's own 30-day average market capitalisation up to September 13.

A vote on the disposal, as well as HSF's continuation, is planned for October 26. If the continuation is passed, it buys HSF some time. Shareholders would next have a continuation vote at an extraordinary general meeting in January 2026, another at the AGM in 2028 and then at every third AGM thereafter.

But Asset Value Investors encouraged shareholders to vote against the disposal and continuation next week Thursday.

"Over the course of the last several weeks, we have spoken with a majority of the share register. Not one of those shareholders is in favour of an immediate sale of the portfolio, yet we believe many will vote against continuation. We urge undecided shareholders not to be swayed by a misleading narrative that a failure to pass the continuation resolution results in a wind up of the company or a fire sale of assets," Asset Value Investors said.

"Voting against continuation should not be perceived as a negative stance to take. On the contrary, we remain excited by the prospects for the company's asset."

It continued: "The company has a bright future. And that may well be with the current manager on revised terms should a new board decide so following consultation with shareholders. But we do, however, strongly believe that a reset is urgently required."

HSF had said that if its continuation is not passed, it would be "required to put forward proposals for the reconstruction, reorganisation or winding-up of the company to the shareholders for their approval within six months".

Asset Value Investors said that should not be interpreted as a fire sale of HSF assets.

"We note the six-month period is a standard clause for closed-end funds with continuation votes. It exists to protect shareholders, not to create a deadline which in any way compromises their best interests, and it could quite easily be extended with the consent of shareholders," Asset Value Investors said.

"[HSF] now trades on a discount to NAV in excess of 50%. It is imperative that the focus now is on addressing all impediments to the shares trading closer to fair value. Voting against continuation would provide a newly reconstituted board with a blank canvas to take on this task. We understand the manager has recently bolstered its team with new hires including a new CFO and general counsel, which we welcome. This should serve them well if the refreshed board decides to ask the Manager to re-pitch for their role in a beauty parade of potential new managers."

Asset Value Investors said it is looking for answers from HSF in respect to the pulled dividend. It noted HSF shares have already gone ex-dividend, a cut-off date which means new investors would not qualify for the latest payout.

Asset Value Investors said: "We are seeking urgent clarification from the company on certain matters in relation to this announcement. This raises yet more questions around the way in which our company is being managed, and we expect shareholders will take this latest development into account when casting their votes at the upcoming meetings."

By Eric Cunha, Alliance News news editor

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