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Sotheby's, the Billionaire and the Reserve Price

Chris Hughes

(Bloomberg Opinion) -- Sotheby’s is under fire for accepting a $2.7 billion takeover bid from billionaire art lover Patrick Drahi. The handling of the sale reflects poorly on the board, even if it led to a generous offer relative to where the stock was trading.

The venerable auctioneer received a takeover approach from a group of unidentified private equity investors in December. Others, including Drahi, followed. As the shares fell from nearly $60 in the middle of 2018 to less than $40 by the year-end, the board should have been on alert to repel opportunistic approaches. It doesn’t look that way judging by the timeline set out in Sotheby’s regulatory filings.

The buyout consortium said it thought the auctioneer was worth a mere $50 a share. The board rejected this – but without much conviction. In fact, it offered the bidder help to raise the price. That would have given the impression Sotheby’s was keen to sell itself. Doubtless encouraged by the board’s friendly rejection, the private equity group raised its offer to a still ungenerous $52.50 a share in May.

Meanwhile, Drahi and a host of others were sniffing around. Board members discussed the correct price for any deal, but they couldn’t agree. The designated director for Sotheby’s biggest shareholder, Chinese insurer Taikang Asset Management, suggested $100 a share.

A knockout bid still hadn’t emerged. Time to get on with the day job? No. A message was conveyed to Drahi that the board was open to a deal and “certain directors” would back one at $65 a share. Faced with this blatant come-on, the billionaire refused to make the desired offer.

A board confident in its view of the company’s intrinsic value, and unswayed by short-term share price falls, would surely have left it there. Not Sotheby’s. It invited Drahi to “get as close as he could” to a price “in the $60s”. He still didn’t oblige.

Sotheby’s lowered its target to $57.50 a share. An intermediary was told that Third Point LLC, an activist that owns 14% of the company and controls several board seats, was ready to sell at the right price. Drahi called the board’s bluff once more, returning with a $57 a share offer in June.

Sotheby’s buckled and also agreed to pay Drahi $111 million if a gatecrasher came along. His offer was at a big 61% premium to then share price, but largely because the stock had fallen further.

Obviously boards should have diverse opinions. Still, couldn’t Sotheby’s have come to a solid view of what it was worth and stuck to it? If some directors think the company is worth $65 a share – barely above where the shares traded last year – why was it backing this deal? Or was that number a tactical ploy? As unhappy U.K. shareholder RWC Partners notes, the auctioneer only used the more pessimistic of its internal financial forecasts as it weighed up its future as an independent company.

The board was at least right not to try to get an auction going or solicit a firm offer from Taikang: it’s far from certain a Chinese bidder would be able to complete a deal. Above all, Sotheby’s shouldn’t have been actively trying to sell itself in the face of bad offers.

If a deal is too cheap, an auction will follow. The snag here is that the break fee adds to the cost of any counter-bid. At 3% of Sotheby’s enterprise value, it is unhelpful to shareholders but not an insurmountable obstacle. The board’s tactics could yet be vindicated if an auction gets going.

To contact the author of this story: Chris Hughes at chughes89@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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