Precious Metals

BY SAM WILLIAMS

[This is a pre-edited draft of a business story that appeared under the headline "Precious Metals" in the New York Post, July 18, 2004.]


Ears weren't the only thing ringing after Friday's Ozzfest tour stop at PNC Arts Arena.

With two acts, Slayer and Slipknot, at the top of the tour lineup and an increasingly cozy relationship with the queen of evil herself, Ozzfest manager Sharon Osborne, cash registers at the Sanctuary Group, Inc. are poised for yet another blowout summer.

"What it all comes down to is this," says Merck Mercuriadis, CEO of Sanctuary's fast-growing U.S. subsidiary. "If a person's an enthusiast, they want everything."

"Everything" in this case means tickets, t-shirts, albums, live concert broadcasts, and DVDs, the major components of Sanctuary's $270 million revenue stream according to last year's annual report.

Say what you will about heavy metal music, but the fans are exceedingly loyal. Sanctuary, meanwhile, has taken that loyalty directly to the bank, offering everything from management to booking to record distribution services and winning over investors on both sides of the Atlantic.

"It's a very clever business model," says Numis Securities media analyst Richard Hitchcock, one of many who holds up a lighter in glowing tribute. "They are trying to capture as much value from the music value chain in a way the major labels just haven't been able to do."

To date, management, touring and merchandising have been off limits major record labels. Although many have attempted to force their way in, artists, recognizing the inherent conflict of interest, have been justifiably wary.

Sanctuary, on the other hand, has its roots in management. Founded in 1981 by Iron Maiden co-managers Andy Taylor and Rob Smallwood, the company has built up its booking and distribution arms an attempt to keep acts in contact with their audience.

Now, with most major labels paring down their rosters to focus on a few top superstars, the company is in the enviable position of cherry-picking top acts. In 2003 Sanctuary distributed a double platinum concert DVD for Kiss, released a U.K. No. 1 remake of "Changes" featuring Kelly and Ozzy Osborne, and handled artist representation duties for Metallica in all regions outside North America.

The company has even been flexing its muscle in the world or reggae and urban music, scooping up overseas distribution rights to stalwart acts like Shabba Ranks and the Wu Tang Clan. Last November, the company paid more than $11 million to acquire Music World Entertainment, the Houston-based management firm best known for Beyoncé and Destiny's Child.

Matthew Knowles, Beyoncé's father and Music World Entertainment's founder, says it was Sanctuary's overseas marketing prowess that sealed the deal.

"A lot of people don't know it, but Beyoncé and Destiny's Child both sell more records outside America than they do inside America," says Knowles. "That was on Sanctuary's radar."

Such acquisitions and a strong British pound are a major reason Sanctuary's revenues are already up 41 percent for the first half of the current fiscal year. The company booked $164 million for the half and expects to better that mark now that the summer concert has finally arrived. Pre-tax profits were $12 million, a 15 percent rise over first half 2003 profits.

So far, the only major concern among investors and analysts is the rising debt load. To help finance the recent signing spree, the company floated an additional 12.1 million shares in March. The company currently owes $130 million, up from $40 million in 2001, a number analysts would like to see come down in the coming months as receipts come in.

"At the moment, the bears would say they're simply buying their position," says Morgan.

Mercuriadis says his company is mindful of its obligations. At the same time, he says, the company is in a rare position to grow with no major competitor in the marketplace. With Beyonce providing the flash and bread-and-butter acts like Iron Maiden and Slayer providing the cash, he sees no reason to tinker with the company business model just yet.

"Our approach has been to work with either established talent or with new talent that we believe can have a relationship with that diehard music enthusiast," says Mercuriadis. "That's what's allowed Iron Maiden to sell 53 million records without any meaningful play on the radio or MTV."