The dramatic announcement this week that Sotheby’s is to be acquired by Moroccan-born, French-Israeli telecommunications entrepreneur Patrick Drahi has left many in the marketplace asking what it will mean for the wider auction industry, as it would bring both of the largest houses, an effective duopoly, under the private ownership of European magnates.
With Christie’s sitting in the portfolio of Groupe Artémis since its acquisition in 1998, alongside other great brands such as the winemaker Château Latour, the newspaper Le Point, and Stade Rennais football club, it has shown the strength of long term thinking rather than chasing quarter-to-quarter results. Christie’s financial earnings report in 2018 showed total sales of 7B USD, versus 6.4B USD for Sotheby’s.
At an offer of 57 USD per common stock, the price proposed by Mr Drahi represents a more than 60% premium over the closing price on June 14 of 35.38 USD, and resulted in the share price jumping to more than 56 USD in the following days. “The acquisition of Sotheby’s will be funded by financing arranged and underwritten by BNP Paribas as well as by equity provided from my own funds”, according to a press release issued by Mr Drahi’s office. Sotheby’s will exist under a company, BidFair USA , which is entirely owned by Mr Drahi, insulating it from his Altice telecommunications entity, similar to the structure Mr Pinault uses to silo Christie’s with Groupe Artémis from his Kering luxury goods group.
The question on the lips of everyone who gravitates to the auction industry is, what does this mean for the company going forward? Having spoken to multiple people with knowledge of the organisation and the wider industry, below are some of the key points regarding the future of the institution that was founded in London in 1744.
More Aggressive Deals
While many have obsessed over why Sotheby’s would agree to the deal, to those familiar with the market, it is clear that the most inevitable change we will see in the future of the storied house is far more aggressive deal structuring when competing for top-tier consignments.
One would expect that it was a rather sore point for the Sotheby’s board to see the Peggy and David Rockefeller collection bring in a total of 832.6M USD for Christie’s, the highest in auction history for a single-owner collection. If Sotheby’s had won the collection last year, and Christie’s had not acquired any additional business, then Sotheby’s would have been market leaders.
But given the current setup, this is a difficult scenario to imagine. When large shareholders from venture capital and private equity backgrounds are focused on increasing margins and eking out further profitability on a quarter-to-quarter basis, rather than a true long term vision and investment in the company, Sotheby’s would have been turning up to a gunfight with a knife on a such a collection.
In a market where consignors of blue chip contemporary art with 8-figure USD estimates regularly play the houses against each other, it is not uncommon for huge sweeteners to be thrown into the deal to win important lots. Where 0% seller’s commission is a given, further steps include large amounts of the buyer’s premium being handed over to the seller (sometimes more than half of the 13.9% charged above 4M USD), and net reserves above low estimate, perfectly legal as long as the low is sold at the low estimate, to ensure the seller is happy with the minimum amount they will get back.
While in-house guarantees are almost entirely a thing of the past, it is not unusual for the house to negotiate for a third party to backstop the lot to ensure it is sold, but a fee has to be paid to the guarantor whether they win the item in question or not, further eating into deal costs. Add to this things such as first-class airline tickets to the sale venue and 5-star hotels for the vendor and extended family, international preview tours for the lots, wide-scale advertising in national newspapers worldwide, and suddenly the 14M USD profit that should be made on a 100M USD painting has been heavily eaten up. This is before even considering other auction costs such as insurance, storage, and staff salaries, so it is not hard to see why these sorts of deals are an easier pill to swallow for someone focused on the next decade’s worth of consignments, rather than an annual dividend based on earnings per share.
It is certain that following the approval by regulators and the delisting of BID from the NYSE after 31 years, Sotheby’s will be in a much stronger position to compete for these sorts of lots and collections that generate so much press coverage. It will be of significant help to the watch department, which appears to have lost at least one significant consignment to the market leader, Phillips, due to deal terms, so it will be interesting to see how things will change in the future.
An Updated Digital Offering
During an interview with Cheddar, the live-stream financial news channel which is in the process of being acquired by Altice USA (owned by Mr Drahi) for 200M USD, Tad Smith, the CEO of Sotheby’s and formerly the CEO of Madison Square Garden company, shared some pertinent information; he mentioned that a significant number of existing buyers are under 40 and that 60% of offerings are under 10,000 USD, one would assume by lot rather than by value.
While the general perception of an auction buyer is that of a grey haired billionaire placing his phone bid from the deck of a yacht or private jet for star lots worth hundreds of millions of dollars, new faces in the sale rooms are abound, including a burgeoning number of young and extremely wealthy Asian aficionados of fine art and other collectibles, who often start by bidding in online auctions at a lower price level to learn the dynamics. Not only technologically savvy, but with many of them having earned their wealth from the industry, it is easy for them to identify friction in the process, be it registering for an account (still a rather antiquated process that often requires scanning documents, and sending signed original letters from your bank to the auction house), placing bids online, or even getting the live stream of an auction to work with minimal lag.
These should be low hanging fruit for someone with so much experience in the telecommunications and media space, so it is exciting to see how some additional resources could be deployed, not only from a client-facing perspective through assets such as the sothebys.com website and mobile app, but also internally, for example using AI-powered tools to combine the Sotheby’s CRM and the external social media presence of clients, to see opportunities for category crossover and additional up-selling. This will not only add to the balance sheet, but can also provide increased business efficiencies, resulting in increased margins without cheapening brand perception, perhaps even being spun into the appearance that a 200-year-plus old company is dynamic and forward-thinking.
This is another area which has the chance to impact the watch department given the huge array of lots that it now offers online. As live sales become more tightly curated with less lots of higher value, an alternative platform is required to offer the lower price, commodity watches that still have value but are not sufficiently interesting to warrant a place in a print catalogue, and the team at Sotheby’s have had good success with their online offerings. While the income generated by the department is virtually a rounding error for the contemporary art team, watches are still an import gateway for many younger collectors to enter the auction world, so a new digital offering, not just with online auctions, but also the way social media and sale promotion is handled, could provide an exciting new way for watches to be leveraged further.
More Focus on Specialists
According to multiple sources within the auction house, one of the current frustrations is the emphasis of the management on people with wider ‘business experience’ making strategic decisions, rather than the specialist teams and those in direct contact with clients. This can result in a direction that may look good for the bottom line, for example reducing entertainment budgets and complimentary print catalogue circulation, but can cause damage to buyer and seller relationships over the long term.
It is well known that Mr Drahi is an ardent collector, so he will inevitably have dealt with the specialist teams and will see the value of their expertise, not just regarding consignments, but also providing a voice from the ground as to how the business can be improved. Through these dialogues, and by empowering employees who show a degree of business acumen (perhaps setting up a serious management training program or sponsoring MBAs), there is the chance to create a business that many employees and collectors have dreamed of: one that is driven by those who are most passionate and educated about the assets being sold.
A Revised Board
When reached for comment, Third Point, whose enigmatic, surf-loving, activist-investor founder Daniel Loeb owns 14% of the stock and famously managed to oust a previous CEO for publicly lambasting him over the price of an executive lunch, said, “We are pleased to have played a role with our fellow Board members in supporting Tad Smith and the management team responsible for this remarkable turnaround and to see Sotheby’s pass into such capable hands. Today’s sale price affirms the value we saw when we first invested in Sotheby’s, and rewards long-term investors like Third Point who believed in its potential.”
The other shareholder who will no doubt have an opinion on Mr Drahi’s offer is Chen Dongsheng, the founder and chairman of Taikang Life Insurance Company (as well as the grandson-in-law of Mao Zedong), who holds 17% of BID stock.
Sotheby’s did mention that the deal has been approved by shareholders, so it would appear the reception is positive, not surprising given the premium on their current share price, and the stock rally that followed the announcement, but it would be expected that Mr Drahi will make some changes to the existing board of directors and bring in some fresh faces. He is clearly well connected, including a close relationship with the French president Emmanuel Macron, so it would be interesting to see who may join and give some new perspective in the fourth quarter of 2019, when the deal is expected to complete.
Leveraging other Group Assets
As previously mentioned, Mr Drahi, through his Altice USA company, owns the innovative live-stream financial news service Cheddar, as well as a vast array of cable networks and other media outlets. Could this expertise be leveraged to improve things like the live streaming of auctions, or how sales are marketed to a wider audience? Time will tell, but it seems like a smart way to take advantage of tools that are already available.
No doubt other opportunities for cross pollination and business improvements will emerge in the months leading up to the completion of the deal; for now, it is easy to be positive about the future for Sotheby’s and its opportunity to once again stand toe-to-toe with its rival.