Hipgnosis Songs Fund (HSF) cut its portfolio valuation by $690m or 26% Monday (3/4) based on a review by Shot Tower Capital and as such will not issue dividends to investors for the "foreseeable future" while it works to pay down debt. Ironically, the move may actually benefit Merck Mercuriadis' Hipgnosis Song Management (HSM), which serves as the fund's investment adviser.

HSF has pushed back against HSM's stewardship and rejected proposed deals to boost revenue and valuation, but yesterday's announcement may be the proverbial case of cutting off one's nose to spite one's face. The reason? The call option Mercuriadis negotiated for himself at the outset, which gives his Blackstone-backed Hipgnosis Songs Capital (HSC) the option to purchase HSF's assets according to a pre-set formula based on the greater of the current stock price or the price set by an independent valuer.

In other words, if HSF and its board are unable to extricate HSM from the agreement and Mercuriadis and Blackstone eventually exercise their call option, they will potentially be purchasing the fund's assets for one heck of a discount—to the tune of hundreds of millions of dollars less than the $440m they offered to pay for 29 individual catalogs last October. Indeed, HSC might have just saved the entirety of the money they would have spent as part of that deal in one fell swoop.

Citing the lack of an up-to-date valuation and under-performing stock prices, HSF chose Shot Tower for the review amid the replacement of board chairman Andrew Sutch with Robert Naylor. In an attempt to drum up further bids, shareholders last month voted to authorize a $25m payment to parties potentially interested in the fund's assets.

Shot Tower estimated HSF's worth between $1.8 and $2.06b. Its midpoint value of $1.93b reflects a net royalty income of 15.9x—a quarter lower than a September 2023 valuation. Shot Tower is expected to present further due diligence to the HSF board before the end of March.