Sanctuary Books Breathing Space

Although Sanctuary Music Group has proved the financial experts were right to predict the company would need to sell some of its assets to improve its trading platform, it looks as if it will need to hive off more than just its books division if it’s going to impress London.

Just as Sanctuary announced the sale of its book publishing (which includes the SMT and Arcane imprints) to the London-based Music Sales Group for an “undisclosed sum,” it issued a September 21st trading update to say its full-year figures will be even worse than the city’s worst fears.

Explaining that the results are likely to be “below the lowest end of current market expectations,” the ad hoc update – which was promised when the company made new banking arrangements August 23rd – makes gloomy reading for shareholders.

“I am well aware that Sanctuary has disappointed the market significantly this year and, with hindsight, it is clear we grew too fast,” was chairman Andy Taylor’s message to the city.

Two years of fast growth includes buying Trinifold for £8 million (US$12.5 million), Destiny’s Child‘s management for £6 million (US$10 million) and Elton John‘s management for £16 million (US$30 million), but the deals were done on borrowed money and the company no longer has strong enough cash flow to support that sort of business.

The trading statement also points out that “recent negative publicity” hasn’t helped the situation, but acknowledges that it comes on the back of poor performances and can hardly be considered a surprise.

Having announced it was talking to a potential purchaser at the beginning of June, the company has now been forced to admit those negotiations are unlikely to yield a positive result, even in the longer term.

Sanctuary is now faced with what one spokesperson described as “painful” measures, which could mean cost-cutting (or job-cutting) or the disposal of assets that are nearer to core business than its book publishing operation.

However, selling the books and maintaining the support of its bankers may well buy the company a little breathing space.

Two weeks ago, there was a ray of sunshine as the share priced gained three pence from 8p to 11p (that’s 37.5 percent nowadays), but even that turned out to be a false dawn.

Some business journalists saw it as a sign that faith in the beleaguered Sanctuary had been rekindled by the sale of the books division, while others suggested the company – which The Times once described as “arguably the most vertically integrated player in the music business” – still needs to sell off a lot more assets and the share price rise may even be a bad sign.

Rather than a rekindling of faith, it now looks more likely that a long-term investor decided to cut his or her losses and flooded the market with 8p shares.

The fact that these were soon snapped up at a bargain basement price, and the shares rose three pence on the back of the trading, may have led other investors to believe there was a mini plunge on the company.

Monitoring the price over the next four weeks may be the best guide to how far the company has slumped into the doldrums.

— John Gammon