Sanctuary Shares Plunge After Profit Warning

Sanctuary shares have plunged by more than 40 percent in the two trading days since the music group warned that earnings for the six-month period ending March 31 will only be about 65 percent of what they were a year ago.

The profit warning came in a June 17 ad hoc release and reported earnings before interest, tax, depreciation and amortisation (EBITDA) are expected to be in the region of 40 percent down on the same period last year. The reason? The company has simply released (and consequently sold) a lot less records.

“The board is now undertaking a thorough review of all the operating divisions with a particular emphasis on ways to improve cash generation and profitability and reduce long-term debt,” the company said.

Following the profit warning, Sanctuary shares collapsed by 31 percent to 29.75 pence before the end of the day.

The Daily Telegraph suggested the stock slump has “fueled speculation that it may be forced to sell off part or all of the company to a larger rival.”

By close of business June 20, they’d dropped another 13.45 percent (from the June 17 close) to 25.75 pence.

Despite the huge cut in income, shareholders could hardly claim to be surprised as executive chairman Andy Taylor told the company AGM March 23 that “the disparity between the first and second halves will be more marked than hitherto.”

Even the promise of improved results in the second half doesn’t mask the fact that the full-year figures to be announced in the autumn will also be well down on the year before, although maybe not by as much as 40 percent.

The June 17 statement also made comment – although “no comment” is probably more accurate – on the June 3 news that the company’s in takeover talks: “The Board has nothing to add at this stage and will make any further announcements as and when it becomes required or relevant to do so.”

Rather than tidying up any loose ends, the current news from Sanctuary leaves them dangling.

The company has taken on additional operational costs in pursuit of its international growth strategy, although some city analysts have questioned whether it has the cash flow to continue buying up management companies (including Elton John‘s Twenty-First Artists Limited) and smaller independent record companies.

That argument is a handy platform on which the financial writers have speculated over whether EMI, Sony BMG, Warner Music or any of a clutch of private investment houses are trying to buy the company.

All of the theories have about the same credibility: It’s been argued that EMI could be frustrated by watching Sony and BMG get it together and sucking in Sanctuary would give it a wider business base; Sony BMG already has an international licensing deal with Sanctuary; and Edgar Bronfman was reported to be looking to acquire management companies through Warner’s stock market flotation.

Most papers are hedging their bets by saying such private equity companies as Spectrum and Apax – which already has a stake in music publisher Stage Three Music – could also be in the frame.

On May 18, Morgan Stanley Securities Limited acquired a shade more than 8 percent of the company. That may well be because it felt its clients would benefit from having a share of the action as opposed to trying to buy it lock, stock and barrel. If that’s the case, it looks a very expensive hunch.

By far the easiest way to get hold of Sanctuary would be to put in an offer that the board will recommend to shareholders, because it would appear very hard to find a strategy for an aggressive bid.

The major shareholders are Dutch TV producer John de Mol (whose investment vehicle Talpa Capital has a near 20 percent stake), and Fidelity Investment Manager and ING Bank, which have a little more than 10 percent each. Even after adding Morgan Stanley’s recently purchased 8 percent, their combined shareholding still falls a shade short of the majority.

Since May 31, Sanctuary shares had risen more than 20 percent – before leveling at around 44.5 pence – and buying the company little by little looked to be an expensive and unwieldy exercise.

It’s hard to say how many shares are thinly spread among its acquisitions – if company stock was part of the deal – or among current or former employees. The last possibility may include Ian Huffam, Jeff Craft and Steve Strange – who all quit Helter Skelter (Sanctuary’s major booking agency) – to form X-Ray Touring with Martin Horne and Scott Thomas from International Talent Booking.

If part of their remuneration was in stock, and they’ve held on to it, then they still could stand to make some small profit from the disposal of what was reckoned to be a £165 million company (nearer £100 million now), although they quit barely five months ago.

Other venture capitalists who may be eyeing Sanctuary could include Bain Capital, Providence Equity Partners and Thomas H. Lee Partners. Those companies may have warmed up to the music business after getting a quick return on their Warner investment when it went public about a year after they’d put their money in.

An interesting counter-theory put out by Investec Securities said Sanctuary might fare better without agreeing to a takeover. It sent a note to investors that said, “Sanctuary has historically argued that its very independence from the majors is one of the key features that attracts talent to it, as both a management company and record label.

“We believe that the logic of such an argument continues. A major record label buying Sanctuary could in effect destroy the model that has so successfully attracted key artists.”

Ironically, the profit warning also came on the back of Sanctuary getting itself into a spat with one of those “key artists.”

Wherever the future increased record sales are coming from, it looks doubtful they’ll be coming from Morrissey. Having sold more than half a million copies of the Sanctuary-released You Are The Quarry, the spat between artist and label is becoming ever more public.

Morrissey took a pop at the company over the weekend of the Isle of Wight Festival (June 10-12) because of confusion over whether he would be appearing.

He didn’t. That left festival booker John Giddings of Clear Channel’s Solo Agency uttering a few country oaths while insisting that Morrissey was definitely confirmed.

“I got Roxy Music to reform so that he’d do it. Morrissey’s one of their biggest fans and that’s why he agreed to play,” Giddings explained.

“I think he’s jerked John [Jackson] and Merck [Mercuriadis] around and I think he’s a wanker,” Giddings said.

“John and Merck are professionals, which is more than can be said for Morrissey. If I’d have canceled him 10 days before the show, would they have sued me? Do I have to put up with them doing that to me?

“John called me up and said Morrissey didn’t have a drummer. I would have had more respect if he had said Morrissey can’t be bothered to turn up.”

The version on Morrissey’s official Web site said, “The announcement that I would play was made by Sanctuary – and it was their error.” However, that doesn’t explain if he’s referring to Sanctuary the record label, Sanctuary the management company or John Jackson’s K2 Agency, which is part-owned by Sanctuary.

Morrissey’s site also said his recording contract with the company “ended last year and hasn’t been renewed” and that “there will be a new signing for the new album.”

Although it doesn’t exactly say that new signing won’t also be with Sanctuary, it does leave the impression Morrissey is either window shopping or trying to draw offers.

Sanctuary Group, which started as a management company in 1976, has developed a broad-based business model and either as record company, manager, publisher or agent works with a massive range of artists which includes Sir Elton, Beyoncé, and Red Hot Chili Peppers.

For the year ended September 30, 2004, it reported steady – although very slightly reduced – pre-tax profits of £16.1 million (US$30.3 million), while turnover was up 45 percent to £220.9 million (US$416 million).

By September 30, 2005, it looks like the turnover will be nearer £165 million and profit down to around £9 million.

A presentation to analysts on the finalised first half interim results will be made by Sanctuary’s senior management team at CSFB’s City Office in London’s Old Broad Street June 28.

— John Gammon