Sotheby’s isn’t necessarily going to become more like Christie’s just because it is going private; Christie’s London Imp-Mod Evening Sale = £36.4m

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.)

The second-day stories on Patrick Drahi’s agreement with Sotheby’s board to take the auction house private have exposed a misunderstanding of the role Sotheby’s listing on the NYSE plays in the company’s management. Confusing cause and effect while ignoring the widely diverging business strategies that the major auction houses have embraced, the press seems to think that Sotheby’s is going private to solve a business problem.

It isn’t. There are some indications, including from Drahi’s own statement, that buying the company helps Drahi move himself and the center of gravity of his business empire closer to the United States. What we do know from the sale is that Drahi instigated it. There’s no indication that he took the company private for strategic reasons. The Chairman and CEO of Sotheby’s statements supporting the move were no more than anodyne cheerleading. The overwhelming fact of the sale is that Sotheby’s is being taken private so Patrick Drahi can be its sole owner, not a shareholder.

Whatever Drahi’s motivations for acquiring Sotheby’s, the company is going private because Drahi is able to borrow enough money to buy it. Indeed, the entire point of the activist campaign to change Sotheby’s management was to execute a plan that would unlock value through the public markets. After five years, and two solid runs at breaking through the stock’s price ceiling, it isn’t a surprise that the remaining activist instigator would sell out to an opportunistic buyer able to assemble ready cash. So while the sale is a red letter day for all involved, especially Sotheby’s shareholding employees, it is also a reluctant admission that the really big payday that would come from staying public is just never going to arrive.

By some accounts of this deal, the transaction is purely a financial play arranged between the principals. Management wasn’t begging the board to take the company private. In fact, Sotheby’s competitors have been mimicking aspects of its public reporting, a sign that they see the value of an auction house being a listed company.

The Wall Street Journal seems to think that Sotheby’s stock was suffering recently because of its disadvantage in top-line market share:

Last year, Sotheby’s sold $6.4 billion in art, up 16% from the prior year, compared with Christie’s $7 billion in sales, up 6% from 2017. Sotheby’s share price suffered as a result, falling 40% over the past year through Friday’s close.

That doesn’t comport with reality. Had Sotheby’s lost significant market share over the previous year, the inference that the stock had been cut nearly in half because of it might be sustainable. That’s not how it played out.

Look at this chart Artprice.com tweeted out yesterday. Christie’s has consistently had more market share than Sotheby’s even as Sotheby’s stock price peaked in mid-2017 and mid-2018, two years when Christie’s showed the most acute market dominance. So we can be confident that Sotheby’s share price didn’t “suffer as a result,” as the WSJ blithely claims.

We do know that starting in June of 2018, Sotheby’s stock price fell. (See the Bloomberg chart above BID in orange, oil in black.) The fall seems to trace a similar rhythm to the fall and rise of the price of oil. Why? No one seems to know. But there’s enough of a correlation for it to come up in conversation as a true fact.

Before June of 2018, Sotheby’s had sold a story of digital transformation that Wall Street seemed to be buying. That tale wasn’t without missteps and setbacks. Still BID was able to ride it to $58 last June.

This pattern calls into question the belief held by the New York Times that,

Flexibility is something Sotheby’s has sorely lacked. As a publicly traded company, it has had to justify every business decision and explain every market fluctuation to shareholders on a quarterly basis. That is a challenge for a business that relies on seasonal revenue and is strongly dependent on the quality of consignments in any given sale.

Let’s not pretend it was easy to deal with a stock price that could get spooked by macro-economic forces beyond management’s control or that it wasn’t stressful or embarrassing to have to own up to errors in business judgment on an analysts call. That’s a far cry from what The Art Newspaper tells us, though.

In truth, it was time the publicly quoted company went private. It was constantly at a disadvantage compared to the world’s leading auction house, Christie’s, because of the necessity of reporting its financial results every quarter. This revealed fine details such as the level of guarantees and other information, such as the existence of defaulting buyers. Once hidden behind the veil of secrecy of a private company, Sotheby’s will be battling Christie’s on the same terms and will be freer to do advantageous deals and outbid its rivals when consigning key works without the world knowing.

In the gossipy art world, few defaulting buyers are kept secret. So it isn’t clear how much of a disadvantage Sotheby’s faced there. Both houses had their dealings with Jho Low revealed, neither through financial reporting. Most of what we know about buyer defaults, including Sotheby’s recent pursuit of Anatole Shagalov over an unpaid-for Keith Haring work, comes from court cases, not Edgar searches.

The author’s last line is the confounding one. In it, she seems to conflate unprofitable deals with ‘advantageous deals’ which makes little sense unless you believe the whole point of an auction house is to gain prestige while losing money.

She also seems to suggest that all one has to do to run a business at a loss is be quiet about it, as if the mounting losses don’t have consquences as long as no one knows about them.

The current and a past CEO of Christie’s have both said repeatedly in public that they are under a great deal of pressure to make profits. What is distinctive about Christie’s ownership is not that it is private but that the private owner is aggressive. Christie’s doesn’t come over the top of its rivals because it wants to lose money. Christie’s has reason to believe that it is rewarded for being the last and highest to bid on prominent collections.

This is how Christie’s won the Rockefeller collection. There is a widespread mis-perception that Sotheby’s struggle with the Taubman collection somehow caused it to lose out on Rockefeller. The truth is the Rockefeller sale came after the Taubman sale because David Rockefeller lived so very long. The deal was actually done much earlier. Despite being public Sotheby’s had bid very aggressively on Rockefeller only to lose without recourse. Rockefeller’s ruthless representative had chosen a negotiating style that required careful and rigid stagecraft. Sotheby’s discovered too late that it was cast in the role of stalking horse.

The massive success of Rockefeller paved the way for the Ebsworth collection which was touch and go until the very end but ended up solidly in the black for Christie’s. Perhaps the best example of a big seemingly reckless bet paying off for Christie’s was the recent sale of 22 works by Richard Diebenkorn from the Zucker collection which Christie’s ‘stole’ from another house by out-bidding its rival. The ‘advantageous deal’ turned out to be a big money maker for Christie’s.