Sanctuary Survival May Rely On Evolution

Somebody seems to have lifted the lid on Sanctuary‘s £130 million refinancing plan, a deal that would all but wipe the equity of the company’s existing shareholders.

“There are so many people involved in the current situation that it only takes one person to say something and suddenly there’s a story,” corporate communications head Eddy Leviten said, denying that the company had leaked the info to The Sunday Times in order to prepare the market for more unsettling news.

Sanctuary put out a December 5th statement reacting to “press speculation” after the previous day’s Sunday Times reported that the company is hiring Evolution corporate financers to launch what amounts to a £130 million rights issue.

The statement listed the measures the company has taken to trade its way out of trouble and went on to confirm that a further option is “a significant equity fund-raising through Evolution Securities, any proceeds of which would be used to reduce debt levels.”

The Sunday Times story had already been picked up by papers including The Times, Financial Times, The Independent and The Daily Telegraph, which were all reporting it as fact.

Sanctuary pointed out that “the Board continues to enjoy the support of its bankers who have recently extended facilities to the Group,” without mentioning – as The Sunday Times reported – that principal lender Bank Of Scotland had called in Ernst & Young accountants to conduct an independent study on the viability of the business.

At close of business December 2nd, the share price stood at 3.25p and the company value at around £12 million. Five years ago, shares had traded at 82p and Sanctuary was valued at £238 million. Since 2000, the company has shrunk 95 percent.

All news reports agree, and the Sanctuary statement says nothing to indicate otherwise, that Evolution is already trying to persuade potential investors to support a restructuring.

As if to acknowledge this is nothing short of major financial surgery, the Sanctuary statement said, “The Board recognises that there is no guarantee that it will succeed in raising further funds.”

If it does, then the cash would be used to settle the company’s £120 million debt.

As the share placing will need to be heavily discounted, it will further dilute the equity of such existing major shareholders as Endemol co-founder John de Mol (nearly 20 percent) and investment houses including Fidelity, UBS, Morgan Stanley and Goldman Sachs.

Sanctuary executive chairman Andy Taylor is also a major shareholder, although he’ll find the blow cushioned by the £2.86 million he netted by exercising a share option in March 2004.

The company is reported to be planning to publish its annual results by the end of the year, a month earlier than usual, leading to further speculation that the restructuring deal will be hurried through as soon as possible.

Sanctuary has always been open about its problems being caused by over-expansion on borrowed money – analysts tend to pinpoint the disastrous £9 million purchase of Beyoncé Knowles’ father’s Music World Entertainment – but has consistently claimed that it’s confident it can trade its way out of what’s beginning to look more like a trench than a trough.

Efforts to sell the business, which has recording, management and agency interests in a massive raft of artists including Elton John, The Who, Joss Stone, Iron Maiden, Red Hot Chili Peppers, Morrissey, and Manic Street Preachers, have all fallen through.

EMI, Warner Music and a number of private equity groups have all been reported as showing interest, although apparently not enough.

The multi-faceted company has had to resort to such draconian cost-cutting measures as laying off a quarter of its staff (175 jobs) and closing down some of its Canadian and U.S. offices.

It’s looking to make annual savings of £8 million, although forecasts suggest it may achieve double that, which would more than cover the £7 million-per-year bank interest it’s paying.

Having stripped its assets right down to those that are essential to core business, including selling its book publishing arm and its mobile recording studios, it’s hung on to its U.K. management companies and the successful Helter Skelter and KK2 booking agencies. Those companies made Sanctuary a combined £8.2 million for the year ending September 30, 2004.

As for the company hierarchy, Taylor is stepping aside to concentrate on the restructuring and will be replaced by a non-executive chairman. The latest reports say finance director Michael Miller will go and some of the creative execs will be replaced by ones who are more “city-friendly” due to their financial backgrounds.

A London stock exchange announcement looks imminent.

— John Gammon