Lex is a premium daily commentary service from the Financial Times. It helps readers make better investment decisions by highlighting key emerging risks and opportunities.
It is no surprise to find hedge fund tycoons loitering at Sotheby's. However, this time they are not chasing a Barnett Newman but the auctioneer itself. Dan Loeb, recently occupied with Sony Corp. and Yahoo Inc., has raised his stake in Sotheby's to 5 per cent. Another agitator, Marcato Capital, owns 7 per cent.
Sotheby's stock has doubled since 2010 and is up 44 per cent in the past year alone, so Mr. Loeb and his smart friends will need all their tricks – property sales, management changes – to pawn off their shares for more than they paid. But the high-end art sales market is inexplicably mired in a duopoly (privately-held Christie's is the other half) so entrepreneurs, not financial alchemists, are what is needed.
Sotheby's and Christie's International PLC combined for about $10-billion (U.S.) in auction volume in 2012, with Sotheby's coming in slightly below its rival. Volume has rallied since the financial crisis but is still down from $11-billion in 2007. Moreover, Sotheby's operating cash flow margin has drifted down to 31 per cent in 2012 from 38 per cent in 2010 – hence the hedge funds' interest. The primary cause of the erosion is Sotheby's focus on high-profile auctions which are the most fiercely contested by Christie's. It has recently tried to raise buyer's premiums (the heaviest fees fall on buyers) in order to arrest the slide.
Regardless of the recent trend, a 30-per-cent operating margin in retail is a rare and beautiful thing. Why, in an era where technology has made most other retail markets more transparent, are there only two places to sell pricey paintings? It is sadly reminiscent of the bank oligopoly that runs the prime IPOs. Sure, Sotheby's and Christie's understand art, know all the right buyers and provide cachet, but is that worth, according to Sotheby's itself, $400,000 in fees for a $2-million purchase? Jeff Bezos and Elon Musk, your next challenge awaits.