The company, whose clients include Elton John, Guns N’ Roses and Beyoncé, is tomorrow holding a board meeting to discuss options, including an emergency rights issue and an acceleration of efforts to find an external investor or buyer.
The heat is on as the City believes Sanctuary is struggling to avoid breaching its banking covenants. “We estimate that unless conditions materially improve, the group risks breaching two of its main four banking covenants,” Conor O’Shea, media analyst at Teather & Greenwood, said last week.
Sanctuary’s founders, old university chums Andy Taylor and Rod Smallwood, are more used to being stock market darlings than ugly ducklings.
The firm was founded in 1976 and had sales of £13m (€19.5m) by the end of 1998. Since then its turnover has soared, hitting £220m last year.
But nine days ago its share price crashed following a profits warning, its second this year. Two weeks earlier the company had claimed it was in talks that could lead to a takeover offer, thought to be from either a competitor such as Warner Music Group or a private-equity firm.
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After the profits warning on June 17, Sanctuary’s shares fell 30% from 43p to 29.75p. On Friday the shares closed at 20Åp amid fears that the group will struggle to restabilise its bruised balance sheet.
On Tuesday, when the company releases its interim results, it is expected to say that discussions with potential suitors are continuing, but that no firm offer has been received.
Taylor, the executive chairman, will say the board has identified areas in which it can slash millions of pounds from the firm’s cost base. A sale of the book-publishing division is one option under consideration.
But analysts and investors are sceptical. O’Shea said: “I cannot see the business surviving in its current form.”
The company’s unique structure — it is not just a record label but also manages artists, acts as a promoter and handles merchandise sales — has attracted clients, but it has created a complex financial model.
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Its rapid growth has been fuelled by an aggressive acquisition policy in which Sanctuary has snapped up clients, including £16m spent on Elton John’s management company in April. The series of purchases has been funded using £30m of debt it tapped from Highbridge, a specialist house.
And the firm could face a fresh headache if negotiations with Morrissey, one of its biggest clients, lead to him leaving the group’s record label. Sanctuary declined to comment.