On Friday (8 September), the board of the Round Hill Music Royalty fund (RHM) agreed to a $468.8m takeover offer by Concord, representing a discount of 11.5% to NAV and a 67% premium to the $0.69 closing share price on 7 September.
As shareholders and analysts digested the news, attention drifted to the Hipgnosis Songs fund, which is trading at a similar discount and will hold its five-year continuation vote at the end of this month.
In a research note on Sunday (10 September), Jefferies analysts Matthew Hose and Fiona Huang said the “inevitable question” is whether SONG could also be subject to a cash offer and, if so, at what price.
Round Hill Music Royalty fund agrees to $470m takeover offer
The analysts said that while SONG may appeal to institutional investors looking to access the music royalty space, given the presence of several ‘iconic’ artists within its portfolio, they see a number of impediments to a bid.
Its much larger size is one such issue, they argued, as the $2.7bn portfolio valuation and market cap of c.£1bn would “easily represent” the largest ever music catalogue transaction, if sold.
Another impediment is portfolio maturity, given SONG has a number of relatively new catalogues still subject to a natural initial decay in revenue, which Hose and Huang said are more difficult to value for the purpose of a bid.
However, the analysts pointed to the manager’s termination option rights, which are much more likely to be exercised in the case of SONG, as the most pertinent impediment to a bid.
Hipgnosis Songs considers strategic options ahead of September continuation vote
“Here the investment advisor has the ability to purchase the portfolio should the management agreement be terminated. The purchase price must be the higher of fair market value, a third-party bid, and/or the market cap (ex cash),” they said.
“In the case of RHM, which has similar termination rights, the manager is instead taking a fee, but for SONG, where the general partner is majority owned by Blackstone, the manager may use Blackstone’s deep pool of capital to keep control of the portfolio.”
This could dissuade other parties from making a bid, they argued. If a bid was to be made, however, Jefferies sees the prospect of a wider discount than RHM’s 11.5% to reflect this, as well as the potential for additional contingent payments to songwriters, and possibly the previously outlined tax liability on the assets.
Jefferies noted the board of RHM had received and rejected a number of prior approaches from Concord. Having agreed on a presumably higher offer, the analysts said this could provide some “positive valuation readacross” for SONG.
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At the trust’s continuation vote at the forthcoming AGM, Huang and Hose said the board will need to present shareholders with a “compelling” offer to deliver value from the shares, or face the prospect of failing the vote, given the extent of SONG’s discount.
“This is most likely to take the form of catalogue disposals, with the proceeds used for a mix of RCF repayment and share buybacks,” they said.
“While SONG’s discount is now narrower at 40.5% we feel Friday’s announcement places even more pressure on it to deliver ahead of the continuation vote, as shareholders will ideally want to replicate the value seen in the RHM bid.”
