Why Warburg Raised Its Paddle For Christie's

Taking the auction house private could prove a clever move

What does a Swiss-owned investment bank want with an art auctioneer? News that SBC Warburg & Co. may make a takeover bid for venerable London auction house Christie's International PLC has the art world abuzz. Christie's and its New York-based archrival, Sotheby's Holdings Inc., are relatively small companies that would attract little attention in other industries. But they are closely watched because of their clientele. Corporate moguls enjoy spending big bucks for paintings they can display as trophies of their triumphs.

As the two sides negotiate, Warburg is being coy about its intentions, and insists it wouldn't launch a hostile takeover. There's no question that Christie's could make a nice addition to the soon-to-be-merged Swiss Bank Corp.'s portfolio. Christie's and Sotheby's have carved out dominant positions in recent years, especially in estate sales. Few dealers can compete with their financial and marketing firepower, and the auction houses' volume seems bound to grow.

But Warburg says it is not planning to enter the art market. Instead, taking the auction house private seems the more likely motive. Christie's is not particularly well managed. Although it passed Sotheby's in auction sales last year for the first time ever, Sotheby's has consistently been more profitable. In the first half of 1997, Sotheby's had profits of $41.9 million and auction sales of $857.7 million, while Christie's had sales of $907.9 million but only about $31 million in profits.

Brian Keelan, the swashbuckling banker leading the Warburg team, may have spotted a ripe target for a leveraged buyout. If he gets control of Christie's, he could take the company private, assemble a group of wealthy investors, and sell them stakes. Tighter management and cost-cutting could boost Christie's cash flow, and a private structure would allow more scope for striking special deals with clients. "A buyout would allow management a freer hand than in a publicly traded company," says Guy A. Bell, an analyst at London brokerage Beeson Gregory Ltd.

Warburg's preliminary offer is about $815 million, or $4.89 per share. Even though Christie's stock is up some 25% in the past two weeks, to about $4.68, the company still looks relatively cheap. Assuming that new management could improve Christie's performance, getting it at this price would be "stealing the company," says one buyout pro. Indeed, a Warburg bid might well bring other potential buyers up to the podium.

ON THE UPSWING. Keelan is striking at an opportune time. After spending the early 1990s in the doldrums, the art business is again on the upswing. Yet while Christie's performance has improved under Chief Executive Christopher M. Davidge, who took over in 1993, it is still not considered as lean and focused as Sotheby's, which is run by Diana D. Brooks, a former Citibank professional.

Davidge is said to like the idea of taking the company private because he would have more leeway to cut the huge deals with clients that are increasingly important in the art business. For example, Christie's recently won the right to auction the Victor and Sally Ganz painting collection, in part by guaranteeing their heirs about $120 million. The paintings sold for $206 million on Nov. 11, but such risky tactics make public shareholders nervous.

A pivotal figure in this game of nerves is Joseph Lewis, the Bahamas-based investor who owns almost 30% of Christie's. Lewis is a British tax exile said to have parlayed a restaurant fortune into an even bigger one through financial trading. Warburg says it would want him in its consortium. Lewis won't comment.

Buying the art house would certainly not be risk-free for Warburg. The art business is volatile, and bitter price competition between Christie's and Sotheby's depresses profits. "It is a low-return business with no sustainable earnings power," says Scott M. Black, a Boston-based money manager and art collector. Black and others say it will be tough to cut costs and boost margins at Christie's without alienating the art experts who bring in hot new material.

Still, Christie's could use a shakeup. Now that investors have glimpsed a higher share price, management will need a good reason to turn down a Warburg bid--or others that may follow.

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