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Sotheby’s Reports $71.2m Loss & “Substantial Doubt” About Continuing; Major June Sales Planned

Sotheby’s new leaders, who took the publicly traded company private, are understandably eager to reopen their New York saleroom for post-pandemic business. Having disclosed a $71.2-million net loss in its 2019 Annual Report (compared to net income of $108.6 million the previous year), the company could use a life-sustaining income infusion. As revealed on p. 61 of its annual report, Sotheby’s expenses related to its merger totaled $132.1 million in 2019.

These losses and the one-off costs for the merger were incurred before the Covid-19 crisis struck in the US, causing the national economy in general and the art market in particular to take a hit. Looking towards a brighter future, Sotheby’s optimistically announced Friday that its “live evening and day auctions of Contemporary and Impressionist & Modern Art, previously scheduled for May, will be held in New York the week of 29 June, pending the lifting of certain restrictions and confirmation from the relevant authorities that we can proceed [emphasis added].”

Roy Lichtenstein, “White Brushstroke I,” 1965
Sotheby’s presale estimate: $20-30 million

The uncertainty of those plans was made clear in comments by NYC Mayor Bill de Blasio, speaking Friday (the same day as Sotheby’s announcement) on New York Public Radio‘s (WNYC‘s) Brian Lehrer Show”:

I’ll have more to say soon on ways we can help small businesses to get through to the point where we can really start reopening, which obviously is a few months away at minimum [emphasis added].

“A few months away”? That would take Sotheby’s past its June 29 target week for kicking off major auctions of Impressionist, modern and contemporary art (not to mention Christie’s plans to hold its major auctions the week before). Perhaps art-auction firms will be regarded by government officials as more consequential than “small businesses.” But art merchants, as distinguished from sellers of clothing or home goods, may not be accorded the highest priority for reopening.

For now, let’s think positively: In response to my query, a Sotheby’s spokesperson told me that other highlights (aside from the Lichtenstein) of its planned June auctions include Francis Bacon’s “Triptych Inspired by the Oresteia of Aeschylus” (presale estimate: “in excess of $60 million”) and works from the collection of of the late Harry W. and Mary Margaret Anderson (familiarly known as “Hunk” and “Moo”). Works being sold from that collection are estimated to bring “in excess of $55 million.” The Andersons gave the core of their holdings to the Anderson Collection at Stanford University, which opened in 2014. (Mr. and Mrs. Anderson died in 2018 and 2019, respectively.)

According to the press release for this disposal (which had originally been scheduled to occur this month), the Anderson consignments consisted of 26 works, including this highlight:

Clyfford Still, “1947-Y-No.1,” 1947
Sotheby’s presale estimate: $25-35 million

The Bacon triptych to be sold at Sotheby’s was acquired in 1984 from Marlborough Fine Art, London by Norwegian collector Hans Rasmus Astrup. It is being sold to benefit his foundation and “underlying entities,” to “ensure long-term support of the Astrup Fearnley Museet, and in particular to expand and diversify the Astrup Fearnley Collection housed therein,” according to Sotheby’s press release.

Whether that purpose justifies selling to the highest bidder a work of great importance to the museum is an open question:

Francis Bacon, “Triptych Inspired by the Oresteia of Aeschylus,” 1981
Sotheby’s presale estimate: “in excess of $60 million”

For its part, Christie’s announced on Mar. 19 that it was “consolidating international 20th-century auctions into one week in one location, New York, scheduled to take place 23 to 28 June.” Its May Impressionist/modern evening sale has been rescheduled for June 23 and its Contemporary evening sale for June 25. In response to my query about highlights for those sales, a Christie’s spokesperson told me this:

We will confirm the timing, format, venue and highlights of our major New York 20th Century Week sales once we have more specific and timely guidance from public health officials and New York state and local government. The health and safety of our staff, our clients and the larger community remains our number-one priority.

In its 2019 Annual Report (much less detailed than the Sotheby’s report), Christie’s reported total sales of $5.8 billion (compared to $5.73 billion at Sotheby’s). In response to my query about whether these figures are apples-to-apples comparisons (comprised of the same components), a Sotheby’s spokesperson said, “Yes, $5.73 billion is the comparable figure to use next to Christie’s number.”

In its Independent Auditors’ report (p. 7 of Sotheby’s 2019 Annual Report), Deloitte & Touche unsparingly described the seriousness of the financial challenges facing Sotheby’s because of the Covid-19 crisis:

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the consolidated financial statements, the Company temporarily suspended the operation of its live auctions in March 2020 due to the COVID-19 pandemic and, as a result, may be unable to meet its obligations when they become due and maintain compliance with its financial covenants required by the New [$250-million] Credit Facilities Agreements over the next twelve months.

The Company has stated that these negative financial conditions raise substantial doubt about the Company’s ability to continue as a going concern [emphasis added].

This was further elucidated by Sotheby’s itself, on p. 16 of its Annual Report:

While we believe the measures we have implemented to date (and plan to continue to implement until we are able to resume our live auctions) may allow us to meet our obligations when they become due and maintain compliance with our financial covenants, we can provide no assurance that the COVID-19 pandemic will not continue to further negatively impact our operations and liquidity or that our implementation efforts will be successful such that we may not be able to meet our obligations as they become due and maintain compliance with our financial covenants over the next twelve months.

The uncertainties associated with our ability to meet our obligations as they become due and maintain compliance with our financial covenants over the next twelve months raises substantial doubt about the Company’s ability to continue as a going concern [emphasis added] as of December 31, 2019 that is not alleviated by our plans, because such plans are not probable of occurrence.

My understanding of the convoluted phraseology of the last sentence is that Sotheby’s is unable to say whether its plans will have the desired effect of enabling it to meet its financial obligations, because it doesn’t know whether it will be able to execute those plans. That said, all art-selling businesses, Christie’s included, are feeling (and fearing) the Covid-19 Effect.

Among auction houses’ financial commitments that could prove to be onerous in an uncertain market are the guarantees they offer to art owners as a lure to help snare their consignments.

Here’s what Sotheby’s annual report had to say about the amounts that consignors have been promised, whether or not the bidding reaches the level of those guarantees:

As of Dec. 31, 2019, we had outstanding auction guarantees totaling $221.7 million….The property related to these auction guarantees is being offered at auctions throughout the first-half of 2020.

Our financial exposure under these auction guarantees is reduced by $63 million as a result of our use of contractual risk-sharing arrangements with third parties….After taking into account these risk-sharing arrangements, as of Dec. 31, 2019, our net financial exposure related to the auction guarantees was $158.7 million….

As of April 29, 2020, our total outstanding auction guarantees increased $43.3 million to $265 million.

In times of economic instability, consignors are more apt to request guarantees to insure against possible failures. But for a company that, by its own admission, has “doubt about [its] ability to continue as a going concern,” ambitious guarantees, if backed by the auction house itself (as distinguished from third parties), could exacerbate that doubt.

Since 2019 was Sotheby’s last year as a publicly traded company, with the concomitant disclosure requirements, I had surmised that future reports would be less detailed, particularly when it came to disclosing the amount of its guarantee exposure (which Christie’s doesn’t reveal). But in response to my query, its spokesperson said: “Sotheby’s continues to have reporting obligations and we will make the appropriate disclosures as long as we need to.”

Whatever the reporting requirements, the results of this year’s public auctions may be a deciding factor in determining the future of New York’s venerable auction firms.

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