Activist group Asset Value Investors (AVI) has taken a public stance against the board of Hipgnosis Songs Fund (SONG ) which slashed the October dividend after the embattled trust’s portfolio valuer reduced expected royalty back payments.

In a public letter published on 16 October AVI’s executive director Tom Treanor implored his fellow shareholders not to be swayed by a ‘misleading narrative’ that a failure to pass the continuation vote would result in a wind up of SONG or a fire sale of assets and urged them to vote against both the deal to sell a fifth of the company’s assets and SONG’s continuation. 

This came just hours after the board of the royalty trust cancelled the trust’s 1.32p per share interim dividend for October as its expected income from retroactive payments was reduced.

AVI’s letter

AVI, who have built a 3% stake in SONG through AVI Global (AGT ) in recent weeks and has a total 5% holding, urged shareholders ‘to take back our company and secure for it a brighter future’. 

Treanor said voting against continuation should not ‘be perceived as a negative stance to take’. 

AVI, who said they had spoken to the majority of the register in recent weeks, highlighted if the vote fails the board are simply required to consult shareholders on the future of the company, which options including its continuation under the same manager under different terms or a new manager.  

The activists also commented that the proposed sale of a fifth of the portfolio to Blackstone was a ‘truly dreadful deal for shareholders’ and that given ‘the depth of opposition’ it was almost certain it would be voted down.

AVI felt the deal, which was advertsied as taking place at a 17.5% discount to net asset value, was actually closer to a 25-30% given the ‘series of give-aways, transaction costs and taxes’. 

The investor added that in a ‘more accommodating market backdrop’ a sale of part of the portfolio could be considered appropriate but it will need to be a decision made by a new board and after extensive shareholder consultation.

Treanor commented the news that the interim dividend was cancelled raised yet more questions around the way in which SONG was being managed and expects shareholders will take this into account when casting their votes at the upcoming meeting on 26 October.

Dividend issues 

In an announcement on Monday outgoing chair Andrew Sutch said the upcoming dividend had to be scrapped because the company risked issues with its lenders over the fixed charge cover ratio. The ratio, which shows how well a company’s cash flows cover its fixed charges such as debt payments, was 1.3 times at the end of March, already above the limit of 1.1  times. 

SONG had anticipated a $21.7m (£17.9m) windfall in retroactive payments as part of the US Copyright Board’s decision to increase royalties owed to artists over the 2018-2022 period. However, Citrin Cooperman, the independent portfolio valuer, reduced its industry-wide expectations, leading the board to lower its anticipated payment to $9.9m

Future dividends are in question until SONG has discussions with its lenders about the impact of the valuation change on its future compliance with the convenant.

Stifel analyst Sachin Saggar said the dividend news reveals that ‘even with multiple advisors, there is a great deal of uncertainity’ about the portfolio valuation. 

‘We believe that a full structural review may need to occur and quickly,’ he added, and commented the current board and manager have ‘lost the ability to take decisions over the future direction of the company’.

In response to the announcement the shares initally plummeted 15% to an all-time low of 63.5p, signalling shareholders discontent ahead of a continuation vote at the annual general meeting on 26 October. They rebounded slightly to trade at 65.7p by late morning. 

Peel Hunt analyst Tom Pocock said the news added ‘significant uncertainty’ to SONG’s prospects.