The cloudy future of Hipgnosis Songs Fund (HSF) became clearer on April 18, when the embattled company’s board of directors publicly supported a $1.4 billion takeover bid by Concord, followed two days later by a $1.5 billion offer by investment giant Blackstone.

Regardless of the buyer, an acquisition would mark an end to the 5-year-old London Stock Exchange-listed company and give shareholders an offramp after HSF faced questions about its operational acuity and, most recently, alleged evidence of accounting missteps that overstated both revenue and its portfolio’s valuation.

Concord’s offer is a 32.2% premium over HSF’s closing price on April 17, but the board said it would support Blackstone’s offer — which represents a 41.8% premium — if the asset manager makes it official.

Blackstone’s bid for the publicly traded music rights company wasn’t a surprise: It owns two other entities under the Hipgnosis name. Blackstone is the majority owner of the public fund’s investment adviser, Hipgnosis Song Management (HSM), and it funds Hipgnosis Songs Capital (HSC), a private music rights fund operated with HSM that has its own portfolio of music rights from such stars as Justin Bieber and Kenny Chesney. Sources say Blackstone’s private fund, HSC, is worth upwards of $700 million. HSM has the right to buy HSF’s portfolio if its advisory agreement is terminated — and Blackstone and HSM “will vigorously protect its interests should the company purport to terminate the [investment advisory agreement],” according to a statement issued by HSM on April 22. “We will use all means necessary to defend our contractual position and interests.”

Neither HSF nor HSM responded to requests to comment for this story.

When investors vote on a proposed acquisition at HSF’s June 10 board meeting, a majority of stock- holders representing at least 75% of voting rights must approve the deal. Before Blackstone’s offer, Concord’s bid had the support of shareholders that own 29.4% of the company’s equity.

Any offer would free the fund and its investors from a serious bind. Once a freewheeling darling of the music business that acquired rights to music by Red Hot Chili Peppers, Neil Young and Shakira, the company suffered from a struggling share price, the cancellation of the dividend and — the coup de grace — an unflattering due diligence report by investment bank Shot Tower Capital released March 28 that found the company’s investment adviser, the Merck Mercuriadis-led HSM, committed a series of missteps. Among them: HSM “materially overstated” annual revenue by improperly accounting for revenue and missed growth forecasts on 75% of the fund’s catalogs by an average of 23% annually, and the investment adviser overstated the amount of control that HSF has over the rights it had acquired. The latter conclusion is key to the value of HSF’s portfolio because owning a song’s copyright is more valuable than owning a writer’s or producer’s share of the royalties it generates.

As a result of its findings, Shot Tower lowered HSF’s portfolio value by 26%, from $2.62 billion to $1.95 billion.

“Shareholders are going to vote for whichever [bid is] the higher,” says Josh Gruss, co-founder and CEO of Round Hill Music, who until last November, ran Round Hill’s rival publicly listed music royalty fund. (Concord bought that public fund last year, and Gruss became a Hipgnosis shareholder a few months later.) “I think investors have been through such a roller coaster most of them just want their money back.”

HSM’s response to the Shot Tower report, which was issued the same day, claimed that aspects of it were “factually inaccurate and misleading.”

Not surprisingly, several of HSF’s largest and most long-lasting investors were angered by the report’s findings. Investment managers, some of whom spoke on the condition of anonymity because they did not want to comment publicly before the next board meeting, said that the report’s findings presented extraordinary examples of gross incompetence and “myriad” accounting issues.

Stifel analyst Sachin Saggar, who raised red flags about the company’s accounting and valuation as far back as 2021, says the Shot Tower report revealed “a catalog of errors” that should have been prevented by the layers of protection — a board of directors, an independent auditor, internal systems and adherence to accounting principles — typically afforded to investors.

“If you had a half-decent board at [the initial public offering], you [could] have stopped some of these things happening very easily because they’re quite obvious and they were well-flagged by us three years ago.”

While the offers could be the answer to HSF’s financial straits, if the Concord bid gets accepted, one question remains: What becomes of Mercuriadis, who is the founder and public face of Hipgnosis, the chairman of HSF’s investment adviser and, until recently, the cocksure self-appointed spokesman for the red-hot song catalog sales market?

The Shot Tower report reinforced doubts that the board can continue to work with Mercuriadis and his team — one investor deems the relationship “broken down” — although parting with him is easier said than done.

Terminating the investment adviser’s contract without cause would give HSM a termination fee and, more critically, an option to buy the entire portfolio at whichever is highest: fair market value, a third party’s bid or the company’s market capitalization.

According to the April 18 announcement, Concord would take over management of HSF’s assets after “a brief transition period” during which Mercuriadis’ HSM remained the investment adviser. The announcement stated that the two sides have not yet begun discussions about terminating the investment advisory agreement.

Matt Hose, a London-based equity analyst for Jefferies, says the HSF board “is trying to highlight that Merck was incompetent so they can terminate [the investment adviser] with cause and not pay out the fees.” He adds that this strategy would prevent Mercuriadis from “stopping the board from selling the portfolio in the open market and getting full value.”

Removing the investment adviser would be an unusual outcome. Hose says he has never seen an investment manager terminated for cause in the 15 years he has covered investment trusts.

HSF’s largest investors support terminating the investment adviser’s contract, but they were reticent to say that the board can prove it has sufficient reason to fire HSM “with cause.”

“People are pretty fed up with the [investment adviser] as a result of this [report],” one investment manager says. “There are some quite extraordinary allegations in this report. I don’t think I’ve seen accusations of gross incompetence laid out in this way. I’ve seen accusations of fraud, but not this.”

Hose points out that, counterintuitively, HSF’s stock price rose 10% on the day the Shot Tower report was released.

“Shareholders want termination for cause because it’s the cleanest exit. Whether they’re going to get it or not — that’s the question.”

If the board moves to terminate the investment manager with cause, investors say Mercuriadis and Blackstone may fight it in court. In such a scenario, they say the two sides would probably settle with HSF for a lump sum of money but not the right to buy the portfolio. They note that a prolonged court battle would bring Blackstone the kind of negative headlines it’s known to avoid.

Other catalog portfolio managers say, bad press be damned, Blackstone will not give up its right to HSF’s quality assets.

“The underlying assets are solid, whether they paid one turn or two turns too much,” says David Schulhof, CEO of music-focused exchange traded fund MUSQ.

A Blackstone acquisition, on the other hand, would be the best outcome for Mercuriadis, as HSM would continue to oversee the portfolio. Regardless of how the aftermath plays out, half a dozen HSF investors and analysts said they cannot see Mercuriadis and HSM remaining the investment manager of a publicly traded fund or the fund continuing as a publicly listed entity.

“It has to spin into a sale at this point,” Round Hill’s Gruss says. “It’s clear that even before these announcements shareholders were hell bent on removing Blackstone as the investment adviser, through legal means or otherwise. It’s a much more elegant solution for shareholders to just sell.”

Despite the enduring value of much of HSF’s portfolio, the board is telling shareholders that a quick sale is their best option. In its April 18 announcement, the board indicated that accepting Concord’s bid would “[mitigate] the risks we see ahead to achieving a material improvement in the share price.” Other than an outright acquisition, it warned, “all alternative options carry significant risks, uncertainties and limitations.”

A version of this story will appear in the April 27, 2024, issue of Billboard.