Sotheby’s Names Cheung First Asian Director as Loss Widens

  • Ex-CEO of Hong Kong Telecom is a major Chinese art collector
  • Shares of the auction house jump the most since August

Sotheby’s elected Chinese businessman and art collector Linus Cheung as its first director from Asia, working with its largest shareholder to add expertise in a key market.

The New York-based auctioneer of fine art and collectibles announced the move along with a wider third-quarter loss as sales declined in a contracting market, according to separate statements Monday.

Linus Cheung

Source: Sotheby’s

The company’s net loss grew to $54.5 million, or 99 cents a share, from $17.9 million, or 26 cents, a year ago. Excluding certain items, the adjusted loss was 78 cents a share, compared with an expected 57 cents, the average of three analysts in a Bloomberg survey. At $91.5 million, revenue was down 34 percent from a year ago, but exceeded the estimate of $75.8 million. Shares jumped to as much as $37.39, up 8.2 percent, the most since Aug. 8, as of 11:42 a.m. in New York.

“Sotheby’s is a high beta stock – and is reacting to both a rally in markets due to a perceived lower uncertainty about the future and firmer commission margins,” David Schick, an analyst at Consumer Edge Research, said about the rally following the earnings.

Sotheby’s, whose shares gained 34 percent this year through last week, is seeking to make a turnaround under Chief Executive Officer Tad Smith. The acquisition of private firm Art Agency Partners in January for as much as $85 million prompted departures by several top dealmakers just as the art market’s contraction accelerated. The company has made progress more recently, winning the $100 million collection of Ann and Steven Ames for this month’s marquee auctions in New York.

Despite a 26 percent decline in auction sales through Sept. 30, there are “some small signs that the market might stabilize,” Smith said during a call with investors on Monday.

“People have money,” he said. “They are tired of the doldrums. They’d like to spend and they’d like to find things to spend it on.”

Cheung is the retired CEO of Hong Kong Telecom and a prominent collector of Chinese art, Sotheby’s said in a separate statement. He served on the boards of companies including Cathay Pacific Airways Ltd., Hong Kong Telecom and Taikang Insurance Group.

Insurer Taikang

Taikang became Sotheby’s largest holder in July, with 14 percent of the shares. The Chinese insurer’s chairman and CEO, Chen Dongsheng, is also the founder and president of China Guardian Auctions Co., one of the country’s biggest auction houses.

In September, Sotheby’s and Taikang began searching for an independent director and the activist shareholder agreed not to increase its stake until the person was chosen. In connection with Cheung’s unanimous election to the board, Taikang agreed not to increase its ownership position beyond 15 percent for a period of three years, subject to certain conditions, Sotheby’s said Monday.

“I am delighted to be joining the board of Sotheby’s, a company I have long admired during my decades as a collector,” Cheung said in the statement. “As the art market continues to evolve and grow in China and across Asia, I look forward to sharing my expertise and experience to best position the company for future success.”

Bellwether Sales

The upcoming bellwether sales of Impressionist, modern, postwar and contemporary works are expected to tally at least $1.06 billion, a 49 percent drop from the low estimate a year ago, at Sotheby’s, Christie’s and Phillips.

The first and third quarters tend to be seasonally slower for Sotheby’s, which holds its main auctions in New York during May and November. The latest results were also affected by a scheduling change that moved an additional contemporary art auction in London into the third quarter in 2015, boosting the company’s year-ago results. This year, a similar auction took place in the second quarter, as usual.

The scheduling change had a positive effect on the commission margins, which jumped to 22 percent from 15 percent a year ago.

“This sale typically includes higher value works of art, which generate lower commission margins,” Sotheby’s said in a filing Monday. “In addition, the timing of this sale also resulted in a lower level of shared auction commissions in the current period due to the competitive environment for consignments in this collecting category.”

Private Sales

Quarterly private sales were another bright spot, almost doubling to $167.9 million from $84.9 million a year ago and beating the expectations.

Private sales were one of the areas Sotheby’s wanted to boost through the acquisition of AAP in January. The firm was purchased for $50 million in cash and $35 million in performance-based earn-out to company executives over the four-to-five year period. The company recognized a $17.2 million compensation expense in the quarter related to the earn-out and revised its forecast.

“The revised level of forecasted achievement against the target reflects Sotheby’s improved market share in the contemporary art collecting category, as well as an improvement in auction commission margins, following the acquisition of AAP,” the company said in a filing. “Management expects that substantially all of the $35 million in earn-out compensation will be earned and recognized by the end of 2016.”

The amount will be paid out in four years, not exceeding $8.75 million on an annual basis, the company said.

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