David Geffen reveals his Basquiat buy; Jeffrey Deitch’s LA life; Allan Schwartzman gets outbid.
This commentary by Marion Maneker is available to AMMpro subscribers. (The first month of AMMpro is free and subscribers are welcome to sign up for the first month and cancel before they are billed.)
This CNBC report on the Patrick Drahi’s bid to take Sotheby’s private in a $3.7bn transaction financed by BNP-Paribas won’t tell you much about the whys and hows of the deal. In some ways, it is a good preview of the fruitless task of speculating about deals.
Nevertheless, we’re in the fruitless speculation business. So let’s offer a few observations on the deal.
CNBC’s David Faber suggests he had heard ‘weeks ago’ that Sotheby’s was moving into ‘a sale mode.’ But the last few months of Sotheby’s stock action combined with the price of the deal would suggest that Patrick Drahi was the instigator of the deal. And, indeed, his representatives confirm that.
As the 2-year chart from Yahoo Financial (above) shows, Drahi is paying a price close to the historic high of the stock. Sotheby’s float is much lower today than it was four years ago. But the stock still trades on some surprisingly consistent price levels. Since 2007, BID has reached a price in the $50-range four previous times. Drahi’s acquisition price will be near the all-time high of $59 reached just a year ago.
Since that price peak, Sotheby’s stock fell to the historic $40 price floor which converts into a ceiling during challenging periods for the art market. Despite a strong sales cycle in New York this May, the stock price collapsed in recent weeks to three-year low of $32. Until this deal, it was looking like $40 would be hard to break through again until the August earnings call. It would have taken very strong numbers to get the stock above $40 again too.
The last time Sotheby’s stock fell into the low 30s, Taikang, the largest shareholder, acquired a 13.5% stake and a seat on the board. With stock buybacks, that stake has only grown. Taikang’s ownership of the domestic auction house China Guardian which could benefit from the auction best practices of an international firm and the reputational value of Sotheby’s seemed to indicate that Taikang would have been the likeliest strategic buyer.
Instead, a private buyer emerged. That Drahi chose to make a bid for the entire company rather than gain a strong position in the stock when it was showing real vulnerability is one of the most interesting aspects of the deal.
Drahi seems to be putting up $400m of his own money, based upon the letter he released this morning, and BNP Paribas is financing the rest. This would suggest Drahi—and more importantly, BNP Paribas—feels the cash flow from the business can fund well into the futre taking the company private. We’ve already seen that Sotheby’s CEO Tad Smith and CFO Mike Goss have been able to consistently fund buybacks. So the deal seems to be driven by persistent low rates and bankers eager to lend money.
This too suggests that Sotheby’s was undervalued by the stock market but not necessarily ripe for a transformation in its business. Technology and the expanding art Contemporary art market were said to be some of the original drivers of the takeover fight of 2013. Even with a few shares of the firm outstanding in the market, Sotheby’s could never breakout above the very top of the stock’s historic range. Which suggests the original buyers have conceded that the art market is tougher nut to crack than originally assumed.
That raises the big question. What does Drahi hope to do with Sotheby’s. Bidfair USA is an entity created for the purpose of owning Sotheby’s. One can read whatever one likes into the name. Beyond that, we’ll all have to wait until after the deal closes to see where this goes.
François Pinault bought Christie’s 21 years ago. He acquired Joe Lewis’s 29% stake first and then offered for the rest of the company. Pinault went on to become one of the world’s leading art collectors. The Al-Thani family tried to buy Christie’s nine years ago for the expressed purpose of getting a panoptic edge in their own collecting. Drahi is 54. He may want to own Sotheby’s for the same reason.
In the meantime, clear winners here are Taikang and Sotheby’s management. Taikang nearly doubled their money in three years. Sotheby’s management got across the finish line in a business that is more complex and challenging to expand than most would have assumed. (Pace CNBC’s comments on data and Sotheby’s supposedly being under-managed.)
Dan Loeb’s Third Point paid a higher price for his shares than Taikang and held them for longer. According to Bloomberg’s Miles Weiss, Loeb’s current 14.3% stake was bought “for a total of $294.3 million, or about $44.18 a share.” They calculate Loeb’s profit on holding the stock for six years was $85.4m. That’s about 29% over six years.
“Today’s sale price affirms the value we saw when we first invested in Sotheby’s, and rewards long-term investors like Third Point who believed in its potential,” Loeb said Monday in a email.
The story, the numbers and Loeb’s quote suggest he is actively positioning the exit as a win for Third Point. Even though 29% over six years isn’t a very strong yearly return for an activist hedge fund; however, it is better than exiting at a loss. Does that telegraph that Loeb was instrumental in setting the price Drahi had to pay?
Other narratives around the sale are that the loss of Sotheby’s public financial reporting is a blow to transparency in the art market. When transparency is used in art market commentary it almost always means ‘stuff we want to know but don’t.’ That’s not market transparency at all. Market transparency is the ability to judge the prices against comparables and assurances that there are no hidden liabilities surround condition, title and authorship. The biggest barrier to art market transparency comes from the private market, not the public auctions which must comply with local regulations whether they are owned privately or have shares traded publicly.
Sotheby’s financials only tell us about how Sotheby’s conducts its business, not what other auction houses are able to generate in terms of profit. Few of the disclosures in Sotheby’s earnings reports would give anyone much insight into the actual trading of individual works. How Sotheby’s arrives at its margins is not necessarily easily transposed onto Christie’s or Phillips or any of the other smaller houses.
Along those lines, others are suggesting that Sotheby’s will now be able to compete more aggressively with Christie’s because it will not longer have to publicly report its profits. Again, that’s strange way at looking at how a business operates. Observers assume Christie’s does not make a profit because Artemis does not report those figures and François Pinault derives other benefits from owning the auction house. Two of the last three CEOs of Christie’s have publicly insisted that the firm does make a profit. They add that they are and were under real pressure from their owner to produce profits. They may just have had a very different strategy to achieve that.
The ‘it-must-be-easier-to-compete-when-you’re-private’ view also ignores the biggest difference between Christie’s and Sotheby’s in the future. Christie’s is wholly owned by a conglomerate with a large balance sheet. Sotheby’s is getting taken out in what is effectively a private equity deal financed with debt. Debt needs to be serviced from operating profits. Rather than no longer facing profit pressures, Sotheby’s now has less room to maneuver than before. It must generate cash flow no matter what.
Geffen Revealed as Basquiat ‘Flexible’ Buyer
Katya Kazakina slipped some big news into the end of her Bloomberg report on Phillips selling Alex Rodriguez’s Jean-Michel Basquiat painting, Pink Elephant with Fire Engine. Phillips is hoping to sell the work for £3m or more. But the kicker to the story is this bit of news:
- “Last year, another 1984 painting by Basquiat, titled “Flexible,” fetched $45 million at Phillips. Billionaire collector David Geffen said in an email Thursday that he was the buyer.”
Jeffrey Deitch’s Life in LA
KCET’s series Artbound releases its episode on Jeffrey Deitch’s live in Los Angeles. The video follows Deitch during the opening of last Fall’s Ai Weiwei show Zodiac at Jeffrey Deitch in Los Angeles. At the gallery and a dinner in Deitch’s home, we see the dealer supervising the last-minute details of construction, catering to fawning of Ai assuming he needed a Chinese restaurant to have lunch and selling, always selling.
One of the highlights is Deitch selling Endeavor’s Ari Emmanuel one of Ai Weiwei zodiac works. Carefully puffing the work to Emmanuel and Emmanuel’s collection to Ai, Deitch says, “[Ari] didn’t know his zodiac sign which is the ox.”
To which Emmanuel replies directly to Ai Weiwei, “which is definitely me.”
Look too for the recurring appearance of Stefan Simchowitz, the South African-born LA advisor/collector who hung around Deitch’s New York gallery when he began his art world journey.
Along with the video, we get a long recitation of Deitch’s career as told by Deitch himself. Here’s one prime example:
- “I applied all these [business and marketing theories] to my understanding of art and cultural trends,” he says. “I began writing about art and economics. I did a thesis project on Andy Warhol as a business artist, and a friend of mine, Maurice Tuchman, who was the curator of the L.A. County Museum (LACMA), was intrigued by this. He asked, ‘Would you consider making a presentation at the College Art Association?’ […]”So Deitch took to the podium at the Hilton in Washington, D.C. in February of 1979, and the way Deitch tells it, that was the moment he became Jeffrey Deitch, International Art Impresario.“It was a key event in my life,” Deitch recalls. “I gave this presentation on Andy Warhol as a business artist, and there were cheers like if a singer really enlivens the club. It was really a breakthrough on the topic. You know how after speeches sometimes people rush to the stage to try to talk to the guy? I had never experienced that. All these people rushed — like, major art collectors. That’s how I met Patsy Nasher of the Nasher Museum. It launched my career in many ways.”
Watch the video here: Artbound — Inside and Out: Jeffrey Deitch’s Life in the Art World
Allan Schwartzman Outbid on a Jennifer Bartlett
The meaning of this commentary from Allan Schwartzman on the recent sale of a Jennifer Bartlett painting from the Lennard collection during Sotheby’s Day sale of Contemporary art for $262,500 (over a $40k low estimate) is a bit of a mystery. Schwartzman seems to be lamenting having lost out on a day sale work he assumed would be lightly contested.
The essay is framed as an appreciation of changing one’s mind about an artist and her work. What sticks out, though, is the oblique way Schwartzman discusses his participation in the auction:
given that Bartlett’s star seemed to have faded in popular opinion, we thought we would be able to grab the painting quietly, within or near the estimate. Apparently, though, we were not the only ones to see it that way.
Who is the ‘we’ here? Schwartzman and his client? Schwartzman for himself? Either way, there would have been easier ways to highlight the success of the work in the sale and re-appraise the artist without mentioning that Schwartzman was an underbidder.
This isn’t to suggest there’s anything wrong with Schwartzman having bid on the work for a client or himself. One might even congratulate Schwartzman for his transparency by not only offering a re-assessment of Bartlett’s work but also letting it be known he was willing to put his (or a client’s) money where his mouth was.