Dan Loeb is an avid contemporary art collector as well as one of Wall Street’s most combative investors. He has bought works by Richard Prince, Basquiat and Andy Warhol, among others, following a passion for art that he says has also turned out to be a successful investment.
But in the case of Sotheby’s, the venerable auction house to which he turned his activist attentions this year, he bought in without liking what he sees. In an open letter in a regulatory filing and published on Wednesday, Mr Loeb tore into Sotheby’s, accusing it of an inability to keep up with shifting art market trends and lambasting it for alleged management excess.
Mr Loeb – now the auctioneer’s largest shareholder with a 9.3 per cent stake – called on chairman and chief executive William Ruprecht to quit with immediate effect, adding that the team at his hedge fund Third Point had already started considering candidates as potential successors.
Industry observers suggest Mr Ruprecht’s Achilles heel has been a failure to produce a consistent, forward-thinking strategy for the company.
“It is acknowledged both in and outside the auction house that he just doesn’t have a competitive vision. It’s long been a festering complaint, especially when many believe that the market spoils were Sotheby’s for the taking,” says Michael Plummer, principal at ArtVest Partners, which provides art market investment advice.
While Sotheby’s has struggled to maintain earnings levels, it has also begun to lag behind its main rival, Christie’s, which has embarked on a more thoroughgoing modernisation.
“Christie’s, by contrast, has a top new management team and is successfully executing a slick and superior global vision – propelling them into an infinitely better position in the 21st century art world,” says Mr Plummer.
Following decades of a near-duopoly of the high-end art sales market, London-based Christie’s has pushed ahead of its New York-based rival.
It announced record sales of $6.27bn for 2012, a rise of 10 per cent from the previous year. Sales at Sotheby’s missed analysts’ estimates, totalling $5.4bn, down 7 per cent from 2011. In August, the company announced that first-half net profit fell 7 per cent to $69.4m.
Christie’s – privately owned by the French luxury goods tycoon François-Henri Pinault – has committed heavy resources into online operations and penetrating lucrative new markets. Chief executive Stephen Murphy inaugurated its mainland China operations in a star-studded display last month. Earlier this summer, it also secured a licence to operate in India. Sotheby’s is yet to hold an auction in either country.
Jeff Rabin of ArtVest says another error by the Sotheby’s executive team has been its focus on the top end of the market, where unpredictable turnover and a fierce rivalry for commissions can weigh heavily on margins.
“It’s made them vulnerable – there is a greater volume of lower-priced items and a much better rate of return possible for the auctioneer. They really should consider re-entering the lower-priced spectrum, even with a sub-brand, if they want to claw back the gap from Christie’s,” Mr Rabin says.
Third Point’s assault on Mr Ruprecht and his team should shake up their strategy, analysts believe.
“Heeding Mr Loeb’s calls for a separation of Mr Ruprecht’s roles as chief executive and chairman would bring Sotheby’s better in line with broader industry best practices,” says Oliver Chen, a retail analyst at Citigroup.
Mr Chen believes that a greater visibility on management policies for outside investors could boost the company’s share price, which despite its public troubles has doubled since 2010 and is up by more than 40 per cent in 2013 alone.
Sotheby’s defended itself against what it called Mr Loeb’s “incendiary and baseless” attack by pointing to the share price, adding that it had “exceeded the Standard & Poor’s Midcap index over the one, five and 10-year periods.” It said it would comment on the letter “at the appropriate time”.
There are some who believe the share price performance has little to do with Sotheby’s strategy, and can be attributed to the booming fine art market. Either way, the auctioneer must now placate its increasingly rowdy Wall Street investors.
It placed its Manhattan headquarters on the market last month and has already received first-round bids, people familiar with the matter said. Analysts estimate the property’s value at up to $600m, which could generate post-tax proceeds of $450m.
Last month Sotheby’s appointed Patrick McClymont, a former Goldman Sachs partner, as chief financial officer, in a move which it said was unrelated to the maelstrom of corporate activism engulfing the business.
“He’s clearly talented and will be a boon to the group, but when it comes to the question of whether Sotheby’s management will be able to reverse its current fortunes – and tame the ire of their largest investor – well, its just far too soon to tell,” says Citigroup’s Mr Chen.
“But make no mistake the gloves are off, and its going to be one hell of a fight.”
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