Sotheby’s, Under Pressure, to Pay Special Dividend and Buy Back Shares

Updated, 8:50 a.m. |

The auction house Sotheby’s promised on Wednesday to return $450 million to shareholders through a special dividend and share buyback, four months after it pledged to review its finances under pressure from several prominent hedge funds.

Sotheby’s will also separate its agency and financial services units as part of a series of changes to its business that it announced on Wednesday.

The move is a nod to two of its largest shareholders, the activist hedge fund managers Daniel S. Loeb of Third Point and Richard T. McGuire of Marcato Capital, who began to make public calls for change at the company last fall.

“The message we are delivering is clear - we are returning meaningful capital to our shareholders now and in the future and establishing a framework that puts Sotheby’s in the strongest position to compete,” the company’s chairman and chief executive, William F. Ruprecht, said.

After it was disclosed that Mr. Loeb, Mr. McGuire and Nelson Peltz’s Trian Partners, another activist hedge fund, were among Sotheby’s biggest shareholders, Mr. Ruprecht announced in September that the auction house would review its financing policies and that it was “committed to pursuing return of capital alternatives.” Trian Partners has since sold its holdings.

But calls for change from the persistent activist hedge fund managers did not subside. In October, Mr. Loeb, who is known for writing vitriolic letters, sent a letter to Mr. Ruprecht calling on him to step down, and requesting a seat on the board.

“Sotheby’s is like an old painting in desperate need of restoration,” Mr. Loeb wrote at the time. He accused the company of a “crisis of management” that created “dysfunctional divisions and a fractured culture.”

A few weeks later, Mr. McGuire announced his own plan for change at Sotheby’s. Speaking to an audience at the Excellence in Investing conference in San Francisco, Mr. McGuire said that Sotheby’s could extract $1.3 billion in cash by selling some of its buildings, changing its financing and giving up its dealer operations. The money could then be returned to shareholders in the form of share buybacks, he said.

On Wednesday, Sotheby’s outlined plans to pay $300 million to shareholders in the form of a special dividend in March and said it would begin a $150 million share repurchase program.

It also gave details of changes to its capital cost structure, which it estimated would bring $22 million in savings. The auction house said it would hold a conference call on Wednesday morning with Mr. Ruprecht.

“We spoke with many of our shareholders and we asked people for their thinking on these topics,” Patrick McClymont, the chief financial officer said on Wednesday. “We look forward to collecting additional feedback.”

The move didn’t completely placate restive shareholders. Mr. McGuire said in a statement that the move was “a modest step in the right direction,” but that the company could do more to return capital to investors, up to $1 billion within 12 months.

“Sotheby’s can return this capital to shareholders and still maintain more than adequate liquidity to meet its long-term strategic objectives,” he said. “We encourage our fellow shareholders to continue to press this board and management team to act urgently and return significant additional capital in 2014.”