With its dividend on ice and major shareholders up in arms, it came as no surprise to see Hipgnosis Songs (SONG) lose its continuation vote on 26 October. But if investors voted pretty decisively against business as usual, it’s not so clear what the future might hold.
Firstly, let’s address one concern that has done the rounds in recent weeks. The failure of the vote simply means that the board must put forward “proposals for the reconstruction, reorganisation or winding up of the company” for shareholders within six months. What it doesn’t mean (as some might have feared) is that the board will automatically be forced to sell off the portfolio – even if this is an option.
Were the fund to continue its existence as a listed entity, one widely held belief is that there would be some big personnel changes. Recent weeks have already seen a shake-up of the board, with chairman Andrew Sutch and two non-executive directors departing, and many suspect the board could seek a different investment manager, too. As Numis put it in a recent note: “The failed continuation vote and the flawed process around the potential portfolio sales appear to show that investors have lost faith in the existing management team. If they had issues with a lack of governance from the board, it implies they have issues with what they were governing. As a result, it is difficult to see a long-term future with the current management.”
Here lies further complexity. The board could serve 12 months’ notice on the current investment management team, but doing so gives that team the right to acquire the portfolio at ‘fair’ value at the end of this period. That could pose difficulties for those SONG shareholders who still believe in the appeal of the portfolio itself but want changes to how the trust is run.
There's plenty of nuance to how this could play out. As Matthew Hose at Jefferies put it: “The question is whether this board is able to propose an open sale process for the portfolio that extracts this fair value for shareholders, while still honouring the manager’s option, or will the existence of the option simply prohibit any realistic bids?” He believes a stipulation that portfolio sales to the manager cannot be conducted on worse terms than in the open market will prove crucial, as would “an independent valuation of the portfolio by a new valuer that gains the trust of the market”.
Other considerations are also worth bearing in mind, including whether the investment manager would be able and willing to buy the entire portfolio or whether we would instead see a partial sale that might evoke concerns about cherry-picking of the fund’s best assets.
It’s worth noting that SONG continues to face some urgent enough problems, most notably in the form of its high levels of debt. Numis has argued that the relatively high levels of leverage should “almost certainly” necessitate some portfolio sales, while some believe balance sheet concerns make a reinstatement of the trust’s dividend seem unlikely for now.
All of that means the trust is still mired in uncertainty, even if the shares look heavily discounted by some measures. From portfolio valuations to the future of the investment manager, the assets and the trust itself, there are too many question marks that still need dispelling.
