Sanctuary: Lowest Of The Low

Although chairman Andy Taylor described this year’s results as being “below the lowest end of current market expectations,” which means it will make an annual loss and not the £1 million to £20 million profit that analysts were predicting 12 months ago, the danger of a total meltdown looks to have passed.

If a company can survive a nine-month period in which its share price drops more than 80 percent, it issues four profit warnings and has to renegotiate its bank covenants, then chances are it will survive longer term.

“It’s absolutely crucial that the banks still think this is a business which is salvageable,” Investec analyst Malcolm Morgan told The Guardian.

The situation the banks are faced with is probably best summed up by the old adage: “If you owe the bank a thousand and you haven’t got it, you have a problem. If you owe the bank £120 million (as Sanctuary does), then the bank has a problem.”

It seems that not everyone shares the banks’ faith. On September 23, Financial Times ran what must have been an embarrassing piece saying Sir Christopher Meyer has resigned as a non-executive director.

Although his day-to-day value to the company is negligible in the current climate, he does have the sort of high profile that tends to impress London.

A former British ambassador to the U.S., he’s been on the Sanctuary board since July 2003, shortly after his return from Washington. He also worked as chief press secretary to John Major, when he was prime minister, and combined his Sanctuary role with chairing the Press Complaints Commission, the independent body that adjudicates on complaints about reporting by newspapers and magazines.

Sanctuary’s strategy for trading its way out of this trough will have been key to renegotiating those bank covenants, but Lorna Tilbian from Numis Securities told The Times “a rescue rights issue or debt-for-equity swap are looking increasingly inevitable.”

What’s even more inevitable, and has been so for weeks, is the fact the company needs to undergo some draconian cost-cutting measures. A couple of days after Sanctuary put out an August 21 trading statement saying the directors are finalising “a fundamental review of the business,” a company spokesperson told Pollstar that some of the short-term measures could well be “painful.”

According to The Times, Sanctuary is likely “to target its trouble-prone U.S. business and will consider offloading assets such as its recording studios and music publishing unit in a desperate bid to trade its way out of trouble.”

The paper’s sources said job losses, particularly in the U.S., are inevitable.

These predictions of further doom and gloom prepped the market for bad news and, within a week, the company was forced to admit that all talks with potential suitors have fallen through.

A further report in The Times quoted “a person familiar with the company” as saying, “[The suitors] were effectively told to put up or shut up, and they chose the latter.”

It’s an understandable choice as any party that had made a per-share offer for Sanctuary during the last three months would probably have overbid.

Any investors who’ve been hanging on in the vain hope that a sell-out to any one of a number of potential buyers – newspaper speculation has included Warner Music, Sony BMG and EMI – would spark a share price revival were left with nothing to hang on to. They finally let go and the price fell a further 16 percent to 6.63. On September 28, the company opened on the London Stock Exchange at 6.5.

Other papers joined The Times in predicting that job cuts are imminent, with some estimating 100 staffers could be packed off within a couple of months.

Touching on what caused the company’s financial collapse in the first place, Taylor has said, “I am well aware that Sanctuary has disappointed the market significantly this year and, with hindsight, it is clear we grew too fast.”

Sanctuary has raked in a bit of cash by hiving off its loss-making book publishing unit, which has the SMT and Arcane imprints, to the London-based Music Sales Group for an “undisclosed sum,” but the company could well be finding it hard to get a decent price for its assets while newspaper headlines are screaming out that it has little choice but to sell.

During the course of 2005, Sanctuary’s market value has plummeted from £200 million to around £25 million.

— John Gammon