Sotheby's Strategy

Skate's Market Notes just published a report stating that Sotheby's response to lost market share to Christie's will not go without a response. According to Skate's Sotheby's is doubling down on its successful finance division and has recently paid $2.7 million in fees to access additional credit. What this probably means is the Sotheby's is planning on making more guarantees in order to obtain the quality art at the top end of the market to remains competitive with Christie's.

As we have noted in the past auction guarantees can be a double edged sword, when it works and the works sell, good things happen, while if the lots fail to sell, having guarantees can be a financial strain and considerably impact profitability. This is why there are more 3rd party guarantees as it spreads the risk beyond just the auction house.  We will have to see how Sotheby's deals with the extra risk and expanded guarantees.

The Skate's report states

While the art world moved to Basel for perhaps the most high volume off-auction trading week of the year, the world’s largest listed auction house was plotting how to bring back the market share lost to its arch-rival Christie’s so painfully last month (see Skate’s detailed coverage).

Sotheby’s primary response seems to push more for what already works – that is providing more capital to its Finance business unit that was consistently the fastest growing segment of Sotheby’s operations over the recent quarters. Last week Sotheby’s announced that it paid $2.7 million in fees to amend its existing Credit Agreements allowing for greater access to cash for its Finance business unit to provide art-secured loans to Sotheby’s customers. As a result of the revised agreement with its creditor (General Electric Credit Corporation), Sotheby’s war chest of cash available to do art loans and auction guarantees goes up from $850 million to approximately $1.3 billion with immediate effect (for detailed disclosure see Current Report dated June 15, 2015).

This is impressive since only last August the firm doubled its access to capital to finance the auctions guarantees business from $300 to $600 million (see Skate’s reporting), and apparently the business went so well that in less than a year since then Sotheby’s had to increase its credit facilities to provide its Finance unit with more firing power.

Based on the Q1 2015 results (the latest available for Sotheby’s), its Finance unit revenue in a single year went from 3.6% to 8.1% of total revenues of the group, more than doubling in Q1 2015 compared to the same period of last year to equal $12.7 million (for the quarter).

Skate’s forecasts that given Sotheby’s strategy to scale back on Principal segment (that is dealing with art on its own account), Finance unit will become the second largest business unit of Sotheby’s after Agency (auction) business already based on the first six months results (of 2015), and amended deal with General Electric Credit Corporation provides Sotheby’s with adequate access to capital to finance this growth.

This strategy makes a lot of sense to us – being the listed firm was long considered a strategic disadvantage for Sotheby’s when compared to its privately held Christie’s adding extra layer of cost and transparency so much despised by the art world. Well, this can also be a strategic advantage as far as access to low cost capital is concerned and Sotheby’s seems to be committed to explore this focusing its efforts on building Finance unit as the core engine of growth going forward.

The capital markets are also feeling increasingly more comfortable with the new leadership of Sotheby’s – the stock started to outperform both S&P 500 and Skate’s Art Stock Index this spring with markets clearly expecting the new pragmatic management of Sotheby’s to win back the business very soon.

Source: Skate's