The Art Of The Art Deal

Sotheby's and Christie's are taking on more risk as they find new ways to profit in a hot market

Normally at an auction, it's the bidders who sweat. But there must have been a tiny bead on the brow of every Sotheby's (BID ) executive when Mark Rothko's White Center came up for sale on May 15. Sotheby's won't confirm it, but a source close to the transaction says the auction house won the right to sell the painting by taking a serious gamble: It guaranteed owner David Rockefeller a sale price of at least $46 million. What if the artwork sold for just $22 million, the previous record for a Rothko? Sotheby's was on the hook for the difference.

The contemporary art market is red hot, but even so, guaranteeing a record price is one huge, unhedged risk. The potential payoff was also large: In addition to a commission from the buyer, Sotheby's would get a cut, estimated at 20%, of every dollar over the $46 million price. When the gavel struck, the gamble paid off: Sotheby's sold the 1950 abstract painting to an anonymous bidder for $72.8 million. Sotheby's estimated take: $11.6 million. To put that in context, analyst Kristine Koerber of JMP Securities figures it works out to 12 cents per Sotheby's share in aftertax earnings.

Sotheby's and Christie's International PLC are undoubtedly raking in some easy commissions during this boom. But they're also profiting in unique ways, as the Rockefeller deal illustrates. They are reinventing themselves by taking ownership stakes in paintings, financing purchases, and buying art galleries. "They've got the auction market, they've expanded their private sales, they operate galleries," says Louis Stern, a longtime gallery owner in Los Angeles. "They've got their tentacles everywhere."

At a time when many skeptics were predicting the art bubble was about to pop, and several well-known collectors were selling, both Sotheby's and Christie's have bet the other way. They made more guarantees, which essentially turn them into partners with sellers, than ever. The move was well-timed--this spring's auction season shattered all sorts of records. During two weeks in May, the two houses sold a combined $1.3 billion worth of art, a 50% leap over 2006 spring sales. International buyers played a part: At Christies' May 9 Impressionist and Modern auction, Americans made up 29% of buyers, down from 51% in 2006.


Although Sotheby's and Christie's have offered guaranteed prices for years, the practice has accelerated as prices have soared. "The auction houses have been offering very compelling deals," says Adam Lindeman, a collector and author of Collecting Contemporary. "They want to hit hard what's in demand that season." Going into the spring sales, Sotheby's had promised to pay sellers at least $326 million in guarantees, up from $185 million in the same period last year. Christie's doesn't release many numbers, but based on notes in its sales catalogs, about a third of the 156 pieces it put up for sale at its two big auctions in New York in May had a guaranteed price behind them.

Sotheby's has also expanded its business of making loans to dealers and collectors, with the intent that the clients will auction their works through Sotheby's. At the end of the first quarter, the company had $231 million in such loans, up from $167 million in the same period last year. In the 15 years ending in 2006, the company says, it has made $2.1 billion in loans and recognized less than $12 million in losses. "Sotheby's has a very good track record of managing this risk prudently," says Chief Financial Officer William S. Sheridan.

Another strategic shift has both art houses acquiring galleries. Sotheby's paid $55 million last year for Noortman Master Paintings, a Dutch dealer in Old Masters. This year Christie's paid an undisclosed sum for Haunch of Venison, a contemporary art gallery with offices in London, Berlin, and Zurich. Owning galleries gives the auction houses entrée into art fairs, such as Art Basel Miami Beach. Those events are a fast-growing part of the market because they allow collectors to shop many galleries at once. In Christie's case, the acquisition also allows it to establish relationships with up-and-coming artists who historically sold only through galleries. Business is "as competitive as ever," says Marc Porter, head of Christie's Americas unit, "both to get property and on the auction floor."

Despite the keen competition, the business remains lucrative. Sotheby's revenues doubled over the past four years, topping $660 million. After losing money in 2003, when its stock traded as low as 7, it earned $107 million last year; its shares now trade at 47. The privately owned Christie's does not release financial results, but is thought to be performing at least as well.

With the unhedged bets and lending, auction houses are starting to seem more like financial-services firms than elite art purveyors. Sotheby's, in fact, is launching a credit card. Purchasers earn points to be redeemed for perks such as a Sotheby's auctioneer for a charity event. Putting a Picasso on plastic? In the fevered art world, anything seems possible.

By Christopher Palmeri

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