Sotheby’s is revamping its financial science â€" now, for the art. The auctioneer’s stock popped, at least initially, on the news on Wednesday of a $300 million special dividend and new criteria for investment. The plan addresses some aspects of the critique by the activist investor Daniel S. Loeb. But governance and broader strategy remain at issue.
The review undertaken by Patrick McClymont, the former Goldman Sachs investment banker hired as Sotheby’s finance chief in September, looks thorough. He has concluded that the firm’s art auction and private sales business should be funded separately from its art lending activities. Using more outside leverage for the finance side will help release cash to pay the dividend.
Mr. McClymont has also identified $22 million in cost cuts this year, roughly 10 percent of analysts’ estimated pretax profit, according to Thomson Reuters. That should somewhat appease Mr. Loeb, whose broadside last fall included claims of wasteful spending. Mr. McClymont also set out investment targets for the newly named agency and financial services businesses â€" a 15 percent return on invested capital and a 20 percent return on equity, respectively â€" in the absence of which, capital would be periodically returned to shareholders.
It was all rational and laid out with unusual clarity, which pleased analysts on Wednesday’s conference call. It should also show Sotheby’s shareholders that there’s a transparent framework in place, even if some might argue the company could have been more aggressive and paid out a bigger sum.
Perhaps more important, though, Mr. Loeb’s complaints, some of which have merit, were mostly aimed at Bill Ruprecht â€" the chairman, chief executive and president of Sotheby’s â€" and the company’s board, calling into question its strategy in crucial areas like red-hot contemporary art and use of the Internet.
The financial review wasn’t intended to address those issues or the poison pill provisions that Sotheby’s introduced after Mr. Loeb revealed a 9.3 percent stake in October. It’s perhaps telling, however, that when the troubled retailer Abercrombie & Fitch abandoned its takeover defenses, stripped its chief executive of his chairman title and added new board members on Tuesday, its shares bounced 5 percent. Sotheby’s doesn’t have Abercrombie’s problems, but checks on executive power and the prospect of being acquired can be worth just as much as hard cash.
Richard Beales is assistant editor for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
