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One more verse from SONG

There has been more news surrounding Hipgnosis Songs Fund (SONG, 73.25p) ahead of its crucial votes on the proposed asset sale and continuation on Thursday. Late last week the board of the trust said that it was to embark on a strategic review to review the management arrangements, amongst other things. This seems a classic case of shutting the stable door after the horse has bolted, and we were not surprised that the managers (technically, investment advisers) declined the board’s request to remove their right to acquire the portfolio on termination of their contract. This morning the board also announced that it has not had any success with its ‘go-shop’ process designed to consider alternative bids for the assets it is proposing to sell. Once more, this process is tainted by the agreements currently in place where the investment adviser has the right to match any higher bids, which reduced the chances of any other bidders going through a detailed due diligence process that may prove to be a waste of time and effort.

This is the underlying issue with SONG that seems to recur, that it has got itself into a tangle with the agreements it has signed, and it has also been less than transparent with shareholders. We were interested to read a broker’s analysis of why the dividend had been passed, given the apparently high headroom on the debt covenants. It boiled down to a change in the payment schedule that meant that only three of the four annual dividend payments were included in the last calculations for the debt covenants, something that was never explained to shareholders.

As commentators, observers and investors absorb each new revelation, the outcome of this shambolic period for the trust seems increasingly clear. The mood has swung fairly definitively away from the existing board and managers, and change now seems inevitable. We believe that shareholders will vote against the asset sale and also against continuation, possibly voting out more board members at the same time. A major investor, Metage Capital, has written a letter to shareholders to argue for the removal of three directors. Their letter can be read here.

Against this backdrop SONG shares rallied on the news of the strategic review and then fell back once the result of the ‘go-shop’ period was announced. All commentators seem to agree there is considerable value to be unlocked for shareholders here, even after taking account of the large sums payable to the investment adviser on termination. The final outcome won’t be optimal, we are sure, but it might still be good when judged against the current depressed share price. For that reason, in spite of all of the noise and regardless of how you might choose to vote this week, we feel the shares are worth holding. Patience should still pay, in our view.

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