This just in. Marcato has sold 2.05m shares of BID back to Sotheby’s for $73.8m which ought to be a price around what the fund paid just over three years ago. (The chart above shows Marcato’s entry point some time before July 23rd 2013 when they filed their 13D. The red line represents Sotheby’s historic trading floor/ceiling of $40.) The 2m shares represent about 40% of Marcato’s recent holdings. The sale should leave Marcato with a stake still above 5% of the company:

On October 3, 2016, Sotheby’s (the “Company”) entered into a Share Repurchase Agreement (the “Share Repurchase Agreement”) with funds managed by Marcato Capital Management LP (the “Sellers”), pursuant to which the Company agreed to purchase 2,050,000 shares of common stock, par value $0.01 per share, of the Company (“Common Stock”) from the Sellers (the “Repurchase Transaction”) for an aggregate purchase price of $73,800,000. The Company’s payments under the Share Repurchase Agreement were funded with cash on hand.

What does this all mean? Although Marcato has sold a large portion of its stake (3.8% of the total shares) it retains 4.9% ownership as well as its seat on the board. While this changes little in the day-to-day for Sotheby’s, it may be an important milestone in the activist story to transform Sotheby’s which we explain for subscribers below:

As the chart (above) demonstrates, Marcato’s activist position in Sotheby’s has not played out very well over the last three years. Richard McGuire was the activist who put Sotheby’s in play in the Summer of 2013 after acquiring a substantial stake in the firm over a few months at approximately $34 to $36 per share. McGuire’s demands as an activist were very specific and relatively limited in scope.

Marcato’s plan was to get Sotheby’s to sell its New York headquarters (an asset that had been bought and sold more than once over the last decade as a way to play with the firm’s balance sheet. That same balance sheet also contained enough cash and assets that Marcato felt the firm could easily lever into cash for dividend or buyback.

Had Marcato remained the sole activist, the plan might have succeeded. But McGuire was soon joined by Daniel Loeb whose own stake eventually slightly exceeded McGuire’s. The two initially worked together to oust Sotheby’s management and install the current team leading the auction house. Loeb became a highly visible advocate of transforming the retailing of art and the auction business.

In retrospect, McGuire is the dog that caught the car. Instead of selling his stake in December of January of 2013/2014 to realize a 47% gain over six months, McGuire hung in as Loeb pursued a jihad against Sotheby’s management which eventually gave the two activists board seats and enough leverage to oust the CEO in the Fall of 2014.

By that time, Sotheby’s stock (BID) had begun to lag the S&P 500. Although the activists ended up gaining everything they wanted, Sotheby’s stock has continued to trail the rest of the market. For a hedge fund to trap a significant amount of capital in a losing or flat investment for three years is a death sentence.

More importantly, the Sotheby’s story—which began as a simple activist play to free up capital and then morphed into a grand ambition to reinvent the auction business—has taken an important turn. At another time, we can discuss Sotheby’s current strategy.

But the net outcome of that strategy was a collapse of Sotheby’s stock in the Winter of 2016 that represented a paper loss of 44% for McGuire. In two years, several lifetimes for a hedge fund, McGuire went from paper profits of 50% to paper losses of 50%. At the bottom of the trough, Marcato could not have seen a likely path to salvage its investment in any sort of reasonable time frame.

Even with a massive buyback program dramatically reducing the number of outstanding shares in BID, the stock remained wounded. Any chance of return to the 50s, let alone a leg higher, would have to wait for a substantial improvement in Sotheby’s operating business. That improvement remains far off. The stock currently trades at 71 times earnings.

With all of this in mind, think about the pressures all hedge funds are feeling to post performance. Against that backdrop, there was a dramatic shift in Sotheby’s story in early August that is only now being fully felt. When Taikang announced it had bought 13.5% of Sotheby’s without moving the stock price substantially, it changed the expectations for Sotheby’s endgame.

As Sotheby’s management negotiated a board seat and a standstill agreement with Taikang, the stock rose to $40 but could not break through its historic floor/ceiling of $40. That’s a very significant number. The stock’s failure to break out further—however reasonable considering the P/E ratio—puts a cap on Marcato’s near-term expectations. Much of that buying was based upon expectations that Taikang might make try to take the rest of the company private which would result in a premium for shareholders.

Here’s where Sotheby’s management’s interest in self-preservation might have conflicted with Marcato’s exigent need to reclaim some of the cash it has invested in the firm. Although there was no serious indication that Taikang is interested in anything more than the strategic advantages of a minority stake and using its board position to learn more about running a global auction house, the standstill agreement effectively locks Sotheby’s stock into a three handle for the remainder of the year.

The good news for McGuire is that the Taikang stake effectively collars Sotheby’s stock where it is. That’s also the bad news. With other investments offering the chance to provide his funds returns, it should be no surprise that McGuire threw in the towel on the better part of his Sotheby’s stake.

For management and other holders, the sale marks the end of the activist phase of Sotheby’s strategy and essentially measures that campaign as a failure.