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Farewell Transparency? Sotheby’s Plans to Go Private (plus a possible glitch)

It’s not over until the shareholders and the regulators sing. But it looks like Sotheby’s—publicly traded for the last 31 years—is set to go private, “in a transaction with an enterprise value of $3.7 billion,” according to yesterday morning’s announcement by Sotheby’s.

Intended to boost Sotheby’s competitiveness for major consignments and other market-related business, this flight from public accountability will deal a knockout blow to whatever transparency remains in “willing buyer-willing seller” auction transactions that have become increasingly clouded by murky, convoluted, secret side-deals. Adieu, fair market value.

If the current plan to take Sotheby’s private is realized, its purchaser will be BidFair USA, the provocatively named entity owned by telecommunications mogul Patrick Drahi. The deal’s closing is expected to occur during this year’s fourth quarter.

Patrick Drahi
Photo from Sotheby’s press release

As a public company, Sotheby’s reports (in its required SEC filings) not just its gross sales figures but also net profits. It also discloses information about the risks it has undertaken—the total amount of outstanding guarantees offered to consignors, which must be paid by the auction house and/or third-party guarantors, whether or not the bidding reaches the level of the amounts guaranteed. If guarantees result in a loss, Sotheby’s discloses that in its public reports.

Perhaps Sotheby’s biggest, most embarrassing risk was the shortfall of its 2015-16 sales from the estate of its former chairman, A. Alfred Taubman (who served jail time for participating in a price-fixing scheme with Christie’s).

A. Alfred Taubman, about to attend a May 2008 contemporary art auction at Sotheby’s
Photo by Lee Rosenbaum

In his Jan. 22, 2016 conference call with securities analysts, Tad Smith, Sotheby’s current CEO, revealed that his firm expected to lose “approximately 1%, or $6 million of the guaranteed amount [for the Taubman consignments], due to a shortfall in sale proceeds.” What’s more, “approximately $6 million of sale-related expenses were incurred [for Taubman] in the fourth quarter of 2015.”

Tad Smith (on right) at Sotheby’s recent press preview of its newly expanded and renovated New York headquarters
Photo by Lee Rosenbaum

Christie’s, by contrast, could privately assume bigger risks, not having to report these to public shareholders or the SEC. As Sotheby’s executive vice president and vice chairman Hugh Hildesley told me, his firm may have lost the unprecedented David Rockefeller estate consignments because “We’re a public company, and we can’t take the risk” of offering a guarantee as high as Christie’s could privately assume. The Taubman debacle likely had a chastening effect.

Hugh Hildesley, perusing Sotheby’s offerings at its presale exhibition for Impressionist, modern and contemporary art
Photo by Lee Rosenbaum

Shortly after the announcement of Sotheby’s “definitive merger agreement to be acquired by BidFair USA,” that deal became a bit less “definitive”: Ademi & O’Reilly LLP, a law firm whose stated mission is “to hold corporations and their insiders accountable,” announced the same day that it was “investigating the Sotheby’s for possible breaches of fiduciary duty and other violations of the law in connection with the sale of Sothbey’s [sic] to Bidfair.”

When I asked a Sotheby’s spokesman for his firm’s reaction to the allegations and the possible legal challenge, the response was: “No comment.”

The meat of Ademi & O’Reilly’s beef against BidFair is that the would-be purchaser is “acquiring Sotheby’s at a substantial discount.” Here’s what the Cudahy, Wisconsin-based law firm alleges:

The merger agreement unreasonably limits competing bids for Sotheby’s by prohibiting solicitation of further bids, and imposing a termination penalty if Sotheby’s accepts a superior bid. Sotheby’s insiders will receive millions of dollars as part of change of control arrangements. We are investigating on the conduct of Sotheby’s board of directors, and whether they are (i) fulfilling their fiduciary duties to all shareholders, and (ii) obtaining a fair and reasonable price for Sotheby’s.

In light of yesterday’s news, Sotheby’s share price soared 58.6% on very high volume (10.34 million shares): It rose from $35.39 at Friday’s close to $56.13 at yesterday’s close. (At this writing, it’s at $56.30.)

Over the past year, the price of Sotheby’s stock plunged into the $30s from its $59.07 price at the close on June 18, 2018. BidFair’s current offer of $57 per share—less than Sotheby’s price a year ago—gives some credence to Ademi & O’Reilly’s suggestion that if Sotheby’s goes private, its shares could be worth more than BidFair’s uncontested offer.

Drahi was described by Sotheby’s as a “media and telecom entrepreneur as well as art collector” [emphasis added]. The press release says he is also “a philanthropist in the fields of education, sciences, culture and the arts.”

But when I asked Sotheby’s for specifics about what Drahi, 55, collects and the nature of his art background, the answer was, “No comment.” It was an uncommunicative answer from a communications mogul who in 2001 founded Altice, the multinational broadband, telecommunications, media, digital and advertising company. (His formal titles: Founder, President of the Board, and Controlling Shareholder, Altice Europe; Chairman of the Board and Controlling Shareholder, Altice USA.)

Much better known for his high-profile artworld activities is fashion mogul and megacollector François Pinault, the owner of Sotheby’s arch-rival, Christie’s.

In his own press release, Drahi stated that he has “full confidence in Sotheby’s management, and hence do not anticipate any change to the Company’s strategy. Management and their exceptional teams and talent around the world will continue to operate with my full support. [emphasis added]”

The company’s second-biggest shareholder (at 6.66 million shares)—Third Point LLC (whose activist investor, Daniel Loeb, was a thorn in the side of Sotheby’s former CEO, William Ruprecht)—has already signed onto a support agreement for the merger.

The Hong Kong-based Taikung Asset Management owns the most Sotheby’s shares, at 7.94 million. I’ll leave it to the business reporters to poll the biggest shareholders on whether they intend to throw their weight (and their shares) behind the merger.

As recounted in the auction house’s rundown of its own history, Sotheby’s first went public in 1977, then went private in 1983 (under Taubman’s ownership), and went public again in 1988 (listed as “BID” on the New York Stock Exchange).

While going private might be an expedient business move for Sotheby’s, it cements the lamentable descent of art auctions from once-reliable market indicators (used by the IRS in determining fair market value) to staging grounds for prearranged market machinations with little public disclosure or accountability.

What innocent art collectors would want to swim in these shark-infested waters (as described by Kelly Crow of the Wall Street Journal)?

Memo to Regulators: Make it stop!

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