It’s official: Sotheby’s assumption of the risk for the consignment of more than 500 works from the estate of its former chairman, A. Alfred Taubman was no coup. It was a flop.
In a conference call with securities analysts this morning, Tad Smith, Sotheby’s CEO, said his firm expects to lose “approximately 1%, or $6 million of the guaranteed amount, due to a shortfall in sale proceeds.” In addition, “approximately $6 million of sale-related expenses were incurred [for Taubman] in the fourth quarter of 2015.”
What’s more, “additional guarantee losses” on the Taubman Collection could accrue if the property yet to be offered in 2016, bearing a presale low estimate of about $24 million, underperforms (as did the most recent Taubman sale of American art and his “Masterworks” sale).
This from a neophyte CEO, eager to make a mark, who in September undertook what I correctly characterized back then as a “whopping risk,” made even more imprudent by the auction house’s subsequent failure to do what the firm had said it might do in its initial announcement—“reduce its exposure under the auction guarantee by entering into risk and reward sharing arrangements [i.e., third-party guarantees, irrevocable bids, etc.] prior to the auctions at which the Estate’s collection is offered.”
More than undermining Sotheby’s bottom line, the Taubman fiasco damaged Smith’s credibility: He had confidently asserted that the Taubman consignment, would be “good for shareholders,” even though the deal struck by the auction house was manifestly disadvantageous.
Again gazing at a cloudy crystal ball, Smith later predicted that the Taubman sales would at least “be sufficient to cover our guarantee.” That hope, it now seems, was illusory.
With the benefit of hindsight (or in my case, foresight), the folly of the Taubman arrangement is crystal clear: Not only was the consignment guaranteed by the auction house at what was deemed to be its full value—$515 million—but at a conference call with securities analysts in November, Smith indicated that Sotheby’s would charge no commission to the sellers and would fork over to them the full amount of the buyer’s premium, unless and until the $515-million payout promised by Sotheby’s to the consignors (regardless of how the sales fared) was achieved. It was an astonishing, perhaps unprecedented gamble, in which Sotheby’s overreached.
During today’s conference call with analysts, the chastened CEO broke from usual practice, passing off two questions about the state of the art market to Amy Cappellazzo, brand new to Sotheby’s (as one of the three principals in its recently acquired Art Agency, Partners), whose expertise is primarily in contemporary art. These were the types of questions that Smith’s predecessor, Sotheby’s veteran Bill Ruprecht, always fielded himself, confidently and informatively.
For the analysts, the big news was not the Taubman debacle but the announcement that Sotheby’s would not be paying the customary quarterly dividend and will instead use that capital (as well as money from the repatriation to the U.S. of approximately $381 million of foreign earnings that were to have been reinvested overseas) to help bankroll a stock-repurchase program, the magnitude of which has now been increased by $200 million, for a total of $450 million (of which $125 million has already been paid).
In its Form 8-K filled today with the SEC to pre-announce 4th-quarter and full-year 2015 results, Sotheby’s estimated it would report a net loss of $10-19 million ($0.15-$0.29 per diluted share), as compared to net income of $74 million ($1.06 per diluted share) the prior year. For the full year ended Dec. 31, Sotheby’s estimated that it would report net income of $36-45 million ($0.52-$0.65 per diluted share), as compared to net income of $118 million ($1.68 per diluted share) the prior year.
Final results will be reported at the end of February.
Looking ahead, here is my slideshow (from photos taken at a Sotheby’s preview exhibition) of four Taubman old masters, formerly on loan from Taubman to the Detroit Institute of Arts, that are due to hit the auction block on Jan. 27:
Here’s the fifth former loan to the DIA, which was displayed by Sotheby’s in another gallery: