Is Sotheby's a Winning Bid?

The worst appears to be over, after the conviction of its former chairman. Trouble is, the stock may already be at a premium

Finally, some good news for Sotheby's. Investors have bid up shares of the big auction house, to $15.73 as of Dec. 17's close, 50% above its low in late September. A big chunk of the gain has come in the days since former Sotheby's Chairman Alfred Taubman, the company's controlling shareholder, was convicted of price-fixing.

The thinking seems to be that Taubman will now sell his stake in Sotheby's (BID ), and the company will be taken over at a premium. Shares jumped more than a point on Dec. 13, the day after it became known that Sotheby's board had ordered its executives to meet with Taubman and try to convince him to sell.

The danger for investors is that Sotheby's shares have already peaked. For one thing, Taubman could easily decide to hold onto his shares. The 76-year-old Michigan real estate baron hired Credit Suisse First Boston early this year to explore the possibility of selling his stake in the company -- 13.2 million Class B shares that give him about one-quarter of Sotheby's but 62% voting control.


  Sotheby's has the right of first refusal if Taubman does sell, so a prospective buyer likely would seek the backing of both Taubman and Sotheby's for a takeover of the entire company. But Taubman is the key player. And, says spokesman Chris Tennyson, he "is under no obligation to sell," despite the felony conviction that leaves him facing up to three years in jail. Taubman "hasn't made a final decision," Tennyson says.

Truth is, even if Taubman does sell, Sotheby's may not command much of a premium. It's hard to justify the current share price in a pure business sense: In the first nine months of this year, Sotheby's lost $41.3 million, or $0.68 per share, on revenues that fell 12% from last year's level, to $225.2 million.

Now, it faces stiff competition in a lagging economy. The most likely buyer -- Bernard Arnault, CEO of the French luxury goods giant LVMH Moët Hennessy Louis Vuitton -- is believed to have offered to buy Sotheby's two years ago, when its shares were trading at a lofty $47. But that was during the dot-com craze, when investors mistakenly thought Internet art sales would surge.


  Today, it seems likely that Arnault would drive a very hard bargain. At its current share price, Sotheby's is worth about $1 billion. Some observers have speculated that a wealthy collector might buy it as a trophy, but that's a big chunk of change for a vanity acquisition. "I think there would be very few other buyers," says Kent Logan, a retired Montgomery Securities executive who is a major art collector. "I don't think LVMH would have to pay a big premium."

Sotheby's was far from favor with investors until recently. Six analysts followed it two years ago. Today, none do, according to First Call. The current takeover speculation has been fanned by Ronald Barron, whose investment funds own about half of Sotheby's common shares. Barron, who appears anxious to get out of what has been a money-losing investment, implies in his company's Sept. 30 annual report that a buyer or buyers were interested in acquiring Sotheby's last summer.

The price being talked about then, Barron says, was "almost 65% higher" than the auction house's flagging share price in September -- which would mean $17 or so per share. Sotheby's, Taubman, and Barron declined to comment further, and no one else is quite sure what offer Barron is referring to. But if he's correct, Sotheby's share price has already jumped to nearly that level. Prudent investors have to wonder: Why would a buyer be willing to pay a lot more now?


  True, Sotheby's may finally be putting its worst troubles behind it. The Taubman conviction should put to an end to the legal woes caused by its participation in a price-fixing scheme with rival Christie's. "The material financial exposure of the company [to the scandal] appears to be pretty much over," says Bill Ruprecht, Sotheby's CEO. Ruprecht's cost-cutting also has helped trim losses substantially. In the first nine months of last year, it lost $182 million, or $3.11 per share -- more than four times as much as this year.

Ruprecht, who has pared back Sotheby's expensive foray into Internet art sales, won't predict when that business might become profitable. He's in the process of eliminating 350 or more jobs and slashing overall annual costs by $50 million. Says the CEO: "I really think we've closed one chapter, and we're now beginning a new one."

The company remains under significant financial pressure, however. With scandal and financial woes wracking confidence, Sotheby's spent $13.7 million dollars in the first nine months of this year on bonuses and other deals to keep key staffers from defecting. At the same time, upstart rival auction house Phillips, de Pury & Luxembourg, which is owned by LVMH, has spent huge sums to lure key art sellers away from Sotheby's and Christie's. Phillips spent big on its sale last fall of the Nathan and Marion Smooke collection of Impressionist and Modern Art -- although it is believed to have lost $60 million or $70 million because the auction generated far lower prices than the company had guaranteed to sellers.


  After running neck-and-neck with Christie's, Sotheby's now shows signs of falling behind. By agreeing first to cooperate with federal prosecutors, Christie's put the price-fixing scandal behind it sooner than its rival. And Christie's seems to be losing fewer sales to Phillips. Sotheby's flagship Impressionist and Modern Art auction in November totaled only $33.1 million, the lowest level in years and far below Phillips' total of $100 million and Christie's of $108.9 million.

And as an independent that has to be accountable to shareholders, Sotheby's could be at a disadvantage to Christie's, which is privately controlled by French financier François Pinault, and Phillips, which has access to LVMH's deep pockets. Taking into account all art auctions through the end of November, Sotheby's estimates that it controlled about 38% of the market, vs. about 42% for Christie's and 20% for Phillips (see BW Online, 11/27/01, "Chipping Away at the Old Auction Bloc"). Marc Porter, Christie's international managing director, claims momentum is with his company at this point: "We feel we're now the auction house of choice," he says.

In any case, skeptics note that Christie's and Sotheby's have never been hugely profitable, even in good years. Retired Montgomery Securities exec Logan contends that the two auction houses must slash their costs far more aggressively to boost margins. "It's not a viable business model to keep selling guns and wine and all the other things they sell just because they've been doing it for 200 years," he says. If LVMH does buy Sotheby's, Arnaud will pare it down to a few highly profitable businesses -- such as selling Contemporary and Impressionist and Modern Art -- just as he has done with Phillips, Logan predicts.

In the meantime, cautious investors might want to steer clear. Though Sotheby's is most likely a takeover play at this point, and it's always possible that several bidders will emerge and push up the share price, given the company's losses, that seems like a long shot.

By Thane Peterson in Chicago

Edited by Douglas Harbrecht

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