Cloud 9 casts shadow over Sanctuary

The auditors of Sanctuary Group, the music business whose roster of clients includes Morrissey and the Libertines, have forced the company to write off £11m of loans to a television company it used to own, a move that will hit its profits for the year.

The auditors of Sanctuary Group, the music business whose roster of clients includes Morrissey and the Libertines, have forced the company to write off £11m of loans to a television company it used to own, a move that will hit its profits for the year.

Its shares dropped nearly 15 per cent, closing down 6.75p at 40p, on the unexpected disclosure that the company will take a £11.4m charge on a loan to Cloud 9, which it sold in 2003.

Sanctuary sold Cloud 9, an Australian-based children's television production company, to its founder Raymond Thompson. It loaned him £28.5m to buy the business in exchange for a share in its revenues. These revenues have been "slower to materialise than had been expected".

Baker Tilly, the company's auditors, told the group to write off £11.4m from its books, fearing the revenues being generated from Cloud 9 will not be sufficient to pay off the loan.

The size of the loan has come under scrutiny from analysts in the past. Richard Hitchcock, from Numis Securities, said: "The loan provision is not a complete surprise as its value was always questioned."

Analysts were surprised by the timing of the announcement, which came only two days before the company reports its results for the year ending September 2004. Malcolm Morgan, of Investec Securities, said: "This doesn't affect the main activities of the business, but it will not improve sentiment towards the company if its auditors request something like this so close to its results. It is not good for management to have to admit a stumble on this." Profit forecasts were cut back by up to 11 per cent to about £16m for 2004.

Sanctuary said its book publishing division will report a loss of £2.1m for the year, "compared to market expectations of break even". The rest of its business is trading in line with expectations.