Wednesday - 23 July 2014

$300m dividend as Sotheby’s shareholder power hits home

05 February 2014Written by Ivan Macquisten

Sotheby’s board have acted to fend off criticism from shareholders led by hedge fund billionaire Daniel Loeb by saying they will issue a $300m special dividend in March.

The announcement is the culmination of a capital allocation and financial policies review launched in September following a stinging rebuke from Mr Loeb, chief executive of Third Point, Sotheby's largest shareholder, which now has a stake of just under 10% of the company.

In a letter to Sotheby's chief executive and chairman Bill Ruprecht at the beginning of last October, in which he urged him to stand down from his positions on the board, Mr Loeb argued that the way the company was being managed failed to create adequate shareholder value.

Mr Ruprecht and his fellow directors countered instantly by issuing shareholders with new rights to acquire company stock, in what is known as a 'poison pill' manoeuvre, to block any bid by Third Point or others to take over the auction house.

However, they also attempted to soften the dose by announcing the capital allocation and financial policies review, which has also now resulted in Sotheby's establishing separate capital structures for the firm's two primary businesses: the auction/private sales business and financial services. Each business will have clear targets for investor return, reportedly of 15% for the first and 20% for the second.

One of the issues at the heart of the dispute between Mr Loeb and the board is thought to be that of competitive marketing, where Sotheby's sacrifice revenues in favour of securing a larger share of headline-grabbing lots. The most conspicuous examples of this are where both Sotheby's and arch rivals Christie's do battle over trophy consignments in the fields of Contemporary and Modern art, agreeing not only to waive all vendors' fees, but to share the buyer's premium with sellers as well.

The result can be record hammer prices but a risk of little or no profit for the auctioneer.

Guarantees

Other competitive marketing strategies include the issuing of guarantees, where consignors are paid out regardless of whether a lot sells or not - agreements usually funded by the auction houses' financial services divisions in the past. This brought rich returns for auctioneers while markets rode high, as they banked a higher share of the profits above the guarantee level when items did sell, but it cost them dear when Contemporary and Modern art prices dropped almost overnight in 2008, leaving them with an extensive hangover of guarantees on forthcoming sales.

As the market has recovered, Sotheby's and Christie's have tended to offset such risks by issuing third-party guarantees, known as irrevocable bids, where a wealthy collector agrees to buy a lot if it does not reach the guarantee level in return for a share of the profits if it does rise above it.

How such strategies will change under the new capital structures and with the company's promise to bring shareholders a better return is not yet evident, but the board has pledged that "potential projects will be measured against an expected return on invested capital over the life of the investment" and says that "going forward, the company intends to return any excess capital to shareholders on an annual basis, primarily through a special dividend".

A 20% return on investment target on the auction business won't make competition against privately-owned Christie's any easier as it is likely to leave Sotheby's with less room for manoeuvre.

Sotheby's have also reiterated that they are considering selling their New York headquarters - although there is less enthusiasm for ditching their Bond Street rooms in London - while chief financial officer Patrick McClymont said of the recent review: "The plan was shaped after much-welcomed input and feedback from our investors and we are committed, as always, to continue that dialogue."

Meanwhile Mr Ruprecht remains confident about the future, saying: "The message we are delivering is clear - we are returning meaningful capital to our shareholders now and in the future and establishing a framework that puts Sotheby's in the strongest position to compete and win in this marketplace while delivering value to our clients."

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