Shareholders voted against the continuation of the £2.4bn trust for another five years on Thursday (26 October), which meant the proposed $440m music catalogue sale to the Blackstone-backed Hipgnosis Songs Capital would not go ahead.
The decision, which was widely expected, concluded an uncertain period for the embattled trust, which has faced severe criticism over what was described as a "truly dreadful" portfolio sale deal and for axing its dividend.
The result has been welcomed by shareholders, including Asset Value Investors and Metage Capital, which have launched public attacks against the board in recent weeks and urged fellow investors to vote against continuation.
"Shareholders have spoken and sent a clear message that the status quo is unacceptable and that a total reset is required," said Tom Treanor, head of research at AVI. "We look forward to a refreshed board working closely with shareholders to turn the company around."
Rehabilitation process
For investors, the outcome marks the start of the process to rehabilitate the trust, enabling a fresh board and potentially allowing for greater shareholder engagement in the future in an attempt to steady the ship.
"The hope is now that a process of rehabilitation can occur as transparency and quality of decision-making improves," said Sachin Saggar, analyst at Stifel.
Chair Andrew Sutch and directors Andrew Wilkinson and Paul Berger were not re-appointed, although Sutch was set to resign next year and Wilkinson and Berger resigned the night before the vote. SONG said it had "expedited" the appointment of a new chair following Sutch's exit at the AGM.
Hipgnosis catalogue sale cancelled as shareholders vote against continuation
"The first step is they need a new chair because nothing can happen until that realistically happens," said Saggar. "You would expect that would happen in the next few weeks, as effectively you can not do anything until that happens."
The incoming chair faces a significant to-do list, as the board will need to put forward proposals for the reconstruction, reorganisation or winding-up of the trust to shareholders for their approval within six months, following the date of the AGM.
Nevertheless, Winterflood analyst Shavar Halberstadt said there remains a desire for deleveraging and questions around NAV credibility, all of which are likely to be evaluated over the course of the strategic review.
'Do or die'
The unsuccessful continuation vote and the rejection of the proposed portfolio sales may indicate that investors have grown sceptical of the current management team's capabilities, according to several analysts.
"If they had issues with a lack of governance from the board, it implies they have issues with what they were governing," said Numis analyst Ewan Lovett-Turner. "As a result, it is difficult to see a long-term future with the current management."
Stifel expects a pre-emptive notice of termination to be served on the investment advisory agreement with the manager, and a selection process to take place for a replacement manager - where the incumbent could also re-pitch.
On termination of the contract, Hipgnosis Songs Management is entitled to acquire the trust's portfolio at a ‘fair' value for a six month period following the termination date through a "call option" clause. However, as Saggar noted, the nature of the termination will also be important.
Hipgnosis Songs fails to attract superior offer for music catalogue sale
"We imagine the new board could explore the option of termination based on negligence, which would remove the need for a termination fee and, based on our understanding, the call option would also lapse," he said.
"It is unclear how feasible this is, but given a string of unforced errors since the IPO, we expect it to be a ‘live' topic. Even the threat of using this option by the board may lead to a more sensible negotiated outcome for all stakeholders."
Saggar noted the call option wording in the trust's prospectus leaves much to interpretation, giving "lots of wiggle room" for the board to make an acquisition by Blackstone difficult.
In this scenario, Saggar said Merck Mercuriadis' firm is left in a "do or die" position, as it does not manage significant enough assets to sustain its infrastructure without the listed fund.
Blackstone acquisition in question
There is a question, however, on whether Blackstone, which would be the ultimate provider of capital in a take-private offer by the investment manager, still wants to buy the assets.
"Will they decide that being in the music acquisition sector has not worked and it is better to cut your losses and move on at this point?" asked Saggar. "It is not a Merck decision, it will be a Blackstone decision, and it is not clear whether they want it or not.
"Given the structuring of the first disposal we would not be surprised if Blackstone declines to exercise the option. However, the potential use of this option is likely supportive to the share price in the interim."
Hipgnosis Songs music catalogue sale comes under scrutiny as continuation vote looms
If Blackstone decides to participate, Jefferies analysts Matthew Hose and Fiona Huang said one additional consideration is whether the manager would acquire the entire portfolio, or only partially.
"The manager clearly wants to maintain the relationships with all the underlying songwriters/artists, which was the initial point of the option, but would its backer Blackstone want to acquire c.$2.5bn of assets, against existing commitments of $1bn?," they asked.
"Moreover, would this be too big for a potential debt securitisation similar to what was conducted on the private fund assets? Any partial sale to the manager could inevitably run into cherry-picking concerns though, particularly given its knowledge of the portfolio."
A full sale of the portfolio is also "preferable", they added, in the context of the debt that should be repaid first, potentially accounting for the proceeds of any initial partial sale.