On September 5, 2019 shareholders of publicly traded Sotheby’s approved a $3.7 billion acquisition offer from BidFair USA, a vehicle owned entirely by French-Israeli media and telecom entrepreneur and art collector Patrick Drahi. With 91% of shareholders in favour, the publicly traded auction house will officially go private after three decades on the New York Stock Exchange.
Mr Drahi was among nine parties interested in a potential merger with Sotheby’s, with major collectors like Ken Griffin, Steve Cohen and Henry Kravis and hedge-fund manager Alexander Klabin suspected as other possible bidders. Known for his highly leveraged deals and unpopular cost-cutting at the communications giant SFR, Drahi harbours a $7.7bn fortune, according to Forbes. He has secured financing from Next Alt, one of his personal holding companies, and BNP Paribas to purchase Sotheby’s. Mr Drahi has said he will finance the purchase with $1.5 billion of his own money and the rest with debt, according to a Wall Street Journal report. He’ll be assuming Sotheby’s existing $1 billion debt.
The 275-year-old auction house filed a preliminary proxy statement to start the shareholder voting process in July, which required more than 50% to approve the sale. The deal, valued at $3.7bn, allows shareholders — including employee shareholders — to receive $57.00 in cash per share of Sotheby’s common stock.
After the auction house abruptly announced the deal in June — which would take the firm private after 31 years of trading publicly on the New York Stock Exchange — several shareholders filed lawsuits in New York to block the sale, at least until further disclosures were made to allow for an informed decision on the transaction. Shareholders Phillip Stevens, Michael Kent, Eli Goffman and Shiva Stein all claimed the information Sotheby’s filed to the Securities and Exchange Commission about its projected cash flow and other aspects of its finances was inadequate.
Art market controlled by French
The finalised sale means that the world’s two leading auction houses now belong to French billionaires, with François Pinault heading up rival Christie's.
Mr Drahi is known in the telecom business for cost-cutting that shrinks payrolls and streamlines operations. That may be difficult to achieve at Sotheby’s. Activist investor Dan Loeb, whose Third Point LLC held about 14.3% of Sotheby’s and pushed for the sale to Drahi, has already rendered much of the fat from its operations, says Lee Rosenbaum, a prominent commentator on the art sale scene, and the author of the blog Culturegrrl.com. Sotheby’s made a profit of $108 million last year on sales of $6.35 billion, while privately held rival Christie’s, which doesn’t report its profits, claimed total sales last year of $7 billion.
Until now, unlike other billionaire art collectors, including Christie's' Pinault, Drahi was not a household name among many in the art market. So what led him to make this purchase? Several in the art world have claimed that this move represents a trophy acquisition rather than a pure financial investment. Drahi himself has provided some limited insight into his motivations: "I am honored that the Board of Sotheby's has decided to recommend my offer.... For my entire life, I have been passionate about this industry and I believe the opportunities and growth potential are significant for Sotheby’s….Sotheby's is one of the most elegant and aspirational brands in the world. As a longtime client and lifetime admirer of the company, I am acquiring Sotheby's together with my family."
Not the first time going private
It is not the first time Sotheby’s has been privatised: shopping mall magnate Alfred Taubman bought the then-floundering auction house in 1983 before it was taken public again in 1988. As Georgina Adam points out, its publicly quoted status has of late put Sotheby’s “constantly at a disadvantage” compared to Christie’s because of the necessity of reporting its financial results every quarter. Yet many have lamented the further loss of transparency in the already opaque art market the privatisation signals.
The drawbacks of being public
Through its quarterly public filings, Sotheby's was an outlier in a market seen by many to be opaque and shrouded in secrecy. Sotheby's was required to report its earnings and losses on a quarterly basis, giving the public regular insight into the realities of the blockbuster fall and spring auctions' financial success or failure, the company's strategy, and the art market's overall health. Although useful for sellers, buyers, dealers and shareholders, these disclosure requirements were often seen to be a competitive disadvantage for Sotheby's, compared with its auction house rivals which, as private companies, were not required to make such disclosures. In fact, Sotheby's CEO, Tad Smith, touted this point in his statement about the acquisition: "This acquisition will provide Sotheby's with the opportunity to accelerate the successful programme of growth initiatives of the past several years in a more flexible private environment. It positions us very well for our future, and I strongly believe that the company will be in excellent hands for decades to come with Patrick as our owner." Based on Smith's own view, "a more flexible private environment" will be beneficial for the company going forward.
Art lore says that the public Sotheby’s was long at a disadvantage to the more nimble and risk-tolerant Christie’s, which is owned by French billionaire François Pinault. Christie’s doesn’t have to answer to shareholders and isn’t punished by stock declines. “There was always this perception that being public hampered our ability to do business,” says Scott Nussbaum, who left Sotheby’s in 2015 after 13 years to join Phillips, a boutique auction house owned by Russia’s Mercury Group.
“There was always this sense that it was an uneven playing field because Christie’s is a private company and therefore able to maneuver in a slightly different way. That was the complaint we heard in the marketplace,” says Abigail Asher, a prominent art consultant based in New York.
(Un)easy choice between Sotheby's and Christie's?
Sellers make choices between houses, in part, based on which team can maximize the value of an object and offer better financial terms, says art adviser Gabriela Palmieri, a former Sotheby’s specialist. For buyers, the house they choose hinges on the quality of artworks — and such practicalities as more favorable payment plans and efficient shipping.
Emotions also play a role in whether a client chooses Sotheby’s or Christie’s or Phillips. Long, of the Fine Art Group, says one of his clients only works with Christie’s because his father had a long-term professional relationship with a specialist there. That doesn’t change with corporate ownership.
Then there’s the optics, which, given that the art world is built on perception, is no small thing. “For many years we thought that Christie’s was doing better than Sotheby’s, but we didn’t really know,” says Barbara Bertozzi Castelli, owner of Castelli Gallery in New York. “Maybe they were losing money.”
Effect on art market
As a public company until now, losing money on a guaranteed artwork would have to be disclosed by Sotheby’s, often contributing to disappointing quarterly results. Shares would nosedive, which in turn could make management more reluctant to offer lucrative deals to future sellers of the most prized works. This dynamic is understood to now change, but as a result the functions of a huge chunk of the market will be hidden from public view.
Sotheby’s going private is important for the art market, where it and Christie’s accounted for 46% of $29 billion in global auction sales in 2018, according to a UBS report. Clients are watching if Sotheby’s will attract more rainmakers and reduce its red tape. As a privately held company, Sotheby’s could take greater risks and cut more backroom deals for big-ticket auction lots than it could as a public company, says Rosenbaum, but the competition with Christie’s means already-low margins could face more pressure. “It will certainly do more business,” she says, “but I don’t know if it will make more profits.”
Looking to the future, Sotheby's going private could usher in many changes. However, for executors looking to sell estate assets, the most potential for change is in the shifting landscape of third-party-backed irrevocable bid guarantees. Irrevocable bid guarantees initially became popular in the auction business as a way to attract sellers, which were often estates needing a set amount of guaranteed sale proceeds to pay estate taxes, by providing a "guarantee" in the form of a set payment, regardless of whether the seller's art ultimately sold at auction. These guarantees have proven particularly useful for executors who do not want to worry about disposing of assets, which failed to sell at auction, that could delay the process of closing an estate. These guarantees were often discussed at the beginning of consignment negotiations and requested by the sellers themselves to secure funds. To lock in such guarantees, the auction houses would then seek out collectors already interested in the art being offered to serve as the third party guarantors securing the financing transactions. The collectors would receive, in exchange for the guarantee, a percentage of the house's commission on the sale. In recent years, however, there has been a shift in the guarantee arena with a number of buy-side investment players coming to auction houses offering to secure guarantees after reviewing what art is being offered in the published catalogues. This has shifted the timing of the negotiation of guarantees. Now, instead of guarantee requests being exclusively made by sellers at the beginning of a consignment negotiation, increasingly, guarantees are being offered to sellers by the auction houses, on behalf of investors wanting to offer financing, sometimes as late as the day of a sale.
Other contributors to art market challenges
The U.S.-China trade war could hurt business, says Rosenbaum, particularly given new tariffs on Chinese art brought to the U.S. for sale and on Chinese buyers of art in the U.S. Meanwhile European customers, particularly in Britain, are likely to be nervous about making big-ticket purchases with the looming specter of Brexit and an economic slowdown.