Sanctuary Profit Warning

Sanctuary chairman Bob Ayling has given what could be interpreted as a two-year profit warning by revealing that the company isn’t likely to be back in the black until 2009.

Although the cash-strapped London-based music company’s year-end figures are far from good, Ayling and chief exec Frank Presland are likely to be quietly pleased that the numbers aren’t anywhere near as bad as Sanctuary’s doubters were probably expecting.

Presland has spent much of what Ayling describes as a "turbulent year" on sharpening up corporate governance, improving financial controls and reshaping (trimming) the business model.

Despite a 10 percent drop in revenues from £148.1 million to £133.2 million, he’s managed to more than half the year-on-year pre-tax losses to £69.6 million.

Getting a grip on corporate governance and financial controls was clearly a priority if Sanctuary was to cling on to the last vestiges of any faith the city ever had in it.

A year ago, Baker Tilly – then Sanctuary’s auditors – said the company had understated its losses by close to £16 million (about 10 percent of actual losses), which must have left shareholders wondering if the accounts had been done on an abacus.

Baker Tilly also claimed Sanctuary’s directors had treated "various significant adjustments" as if they were "changes in accounting policy" and made it clear that it felt the company’s approach was in contravention of the 1985 Companies Act.

Although Baker Tilly was fired as auditor before Ayling came in as the new chairman, his arrival was soon followed by Sanctuary founder Andy Taylor being shown the door.

Taylor was behind the changes in accounting policy.

It’s hardly the sort of scenario that inspires investor confidence, and the true value of Sanctuary’s shares fell 97 percent during the course of the financial year.

Reuters’ risk indicator chart described it as a "Highly Volatile Venture" – ironically pre-figuring the boardroom and executive shakeups that would follow in the autumn.

Since the end of the year (September 30, 2006), there’s been further savings – including the departure of the costly Merck Mercuriadis.

Mercuriadis was Taylor’s protégé and had little support from within the company once the former chairman was gone.

Having given up screwing itself into the ground by trying to spin its image as a "360 degree" business model, Sanctuary’s now trimmed down to focus on three sectors.

"We now have a new business strategy, with the group divided into three autonomous divisions, each focused on its own profit and cash generation," Presland told Financial Times.

Sanctuary has also cut its debt from £131 million to £57.5 million, although those figures alone don’t tell the whole story.

The debt actually went up from £131 million to about £158 million between September 2005 and February 2006, then the bank and bondholders wrote off £35 million.

HBOS, the corporate investment wing of Bank Of Scotland, scrubbed £17 million worth of debt in order to protect the other £115 million it was owed. Highbridge bondholders wrote off £18 million to protect a further £12 million.

Some U.K. papers have speculated that Presland has stripped down the company to three sectors, with recorded music, artist management and merchandising as separate units, because they become easier to hive off.

Sanctuary is obviously disappointed with a poor performance from the 49 percent-owned indie label Rough Trade, which – despite an impressive roster of emerging talent – has been up for sale for a couple of months.

In November, the company said it had received a number of offers for several of its businesses and that it would consider them after its annual results.