Worth 43.75p on June 3, just after the multi-faceted music business had announced it was in takeover talks, they opened at 18.25p on the London Stock Exchange June 29th.
Although nearly 60 percent of Sanctuary’s capital value has been wiped within the space of 20 trading days, the U.K.’s The Guardian reported the company as denying it’s in danger of breaching its bank covenants or considering a rights issue.
However, the board has said debts are at “a higher level” than it’s “comfortable with going forward,” and analysts are predicting that the company may need to take some draconian measures to turn things around.
“If you’ve got £120 million of debt, I don’t think we’re talking about selling off odds and ends here. They need to at least halve their debt, if not more,” Investec analyst Malcolm Morgan told The Guardian.
Some analysts are suggesting the company is perilously close to its debt limit of 4.5 times earnings and, even if its bankers give it some grace, Bridgewell analyst Patrick Yau says, “They’re right up against it.”
After the board announced that earnings for the first half-year (up to March 31st) had fallen from £10.6 million to £6.6 million and a “regrettable and unacceptable” 81 percent profit plunge to £1.3 million, it said it was still “confident the group can return to acceptable levels of profit and cash generation.”
Apart from trying to sell the whole show lock, stock and barrel to either a major record company or an investment house, analysts are also suggesting Sanctuary could rein in its costs to reflect the lower earnings, cut up to 10 percent of its workforce and amalgamate offices. It’s estimated that could make a quick costs saving of between £7 million and £8 million. Selling its books division and its classical recording rights could also be a way of raising money.
The basic underlying problem, according to Morgan, is that Sanctuary has pursued growth at the expense of cost management. The problems of paying off the debt incurred by making those acquisitions have become highlighted now that record sales are down.
The slump in record sales is something the company has already addressed: After the first half sales slipped 1.3 million units (worth £9.3 million), it restructured its Urban Music division.
Mathew Knowles (Beyoncé’s father), who had headed it up, has been shifted to being in charge of “artist relationships,” while other executives will now take over responsibility for production.
Andy Taylor, Sanctuary’s chief exec, told The Independent that, although debt had risen to £117.7 million, the Bank of Scotland and main bondholder Highbridge continued to be supportive of the business.
The paper also had him showing disappointment at the stock market’s reaction and quoting him as saying, “In 30 years of business, this is not the first time we have had a blip. Our model is working, we’ve had a bit of a slip … and we regret that, but it’s the sort of thing that happens.
“Given the way the City has reacted, you do lose your faith in human nature sometimes.”
– John Gammon