Issue #12  3/1/2000
More Woes For Sotheby's: Execs Leave, Antitrust Actions Multiply and Stock Hits Low For Year; Will Ebay Make Bid For Troubled Auction House?

A federal judge plans to consolidate over 40 antitrust suits alleging commission price-fixing by auction houses Sotheby's Holdings Inc. and Christie's International to determine whether the cases will get class action status. U.S. District Judge Lewis Kaplan said during a hearing last week he expected the litigation would be resolved within a year.  A tentative trial date was set for February 2001, in the event no settlement is reached. Kaplan says he plans to issue the consolidation order this week and he gave plaintiffs until March 22 to submit motions requesting class action status for the cases.

Various sources claim that over 40 antitrust suits have been filed in the federal court in New York before Kaplan and other judges.  A number of cases have also been filed in other jurisdictions, including Michigan, California and Pennsylvania. 

The lawsuits surfaced after Christie's announcement on January 28 it had told the U.S. Justice Department that behavior by former management might be relevant to the government's antitrust action.  Christie's statements appear to give new life to the case, which began nearly three years ago. 

In addition, the New York Times reports that a federal grand jury in Manhattan was also examining whether the auction houses engaged in price fixing.

Apparently Canadian metals trader Herbert Black of Montreal filed the first suit in this wave of cases seeking class action status over alleged price fixing January 31. The suit alleges that as early as 1992 the auction houses agreed to stop competing with one another on the basis of fees.  The suit further alleges the firms conspired to raise their commission to the same levels. 

The latest twist is the addition of class action suits in New York, Michigan and Pennsylvania relating to Sotheby's stock.  The Michigan complaint charges Sotheby's and its senior officer with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  The complaint alleges defendants issued a series of false and misleading statements about the Company's revenues, which resulted in artificially inflated stock prices during the Class Period.  The complaint further alleges defendants failed to disclose that the Company's revenues were both reliant upon and unsustainable at the Class Period levels in the absence of an illegal price fixing arrangement with Christie's International PLC. 

This class action complaint has been filed in the United States District Court for the Eastern District of Michigan by Miller Faucher and Cafferty LLP on behalf of a Class of persons who purchased the common stock of Sotheby's Holdings, "at artificially inflated prices during the period February 11, 1997 through January 28, 2000 ("Class Period") and who were damaged thereby."  The plaintiff seeks to recover damages on behalf of all purchasers of Sotheby's common stock during the Class Period.  The suits in New York and Pennsylvania allege similar damages.

Early last week A. Alfred Taubman stepped down as chairman of Sotheby's and Diana Brooks resigned as president and chief executive officer.  The company gave no reason for their sudden departures.

Brooks, who joined Sotheby's in 1979, had been president and CEO since 1994.  Taubman, who took the helm at Sotheby's in 1983, owns about 13 million or 23% of Sotheby's total shares outstanding, which represent an approximate 63% voting interest. Taubman's voting power remains unaffected by his resignation and, for now at least, he will keep his seat on the board.   Sotheby's then tapped Michael Sovern, a former president of Columbia University in New York, as its new chairman of the board.  William Ruprecht, who has been managing director of Sotheby's North and South America since 1994, will become president and chief executive.  Robin Woodhead, chief executive of Sotheby's Europe and Asia and an executive vice president of Sotheby's Holdings, and Deborah Zoullas, executive vice president of Sotheby's Holdings, will also join the new executive team.  Ruprecht, Woodhead and Zoullas were elected to Sotheby's board, effective immediately.

Meanwhile, Fitch IBCA placed Sotheby's Holdings, Inc.'s $100-million 'A' rated 6.875% senior notes and Sotheby's Inc.'s $300-million 'F1' rated 3(a) 3 commercial paper program on RatingAlert-Negative.  In resolving the RatingAlert-Negative status, Fitch IBCA says it will meet with Sotheby's new management team to discuss the findings and strategic and monetary effects of the government investigations and lawsuits. In addition, the impact on the company's strategic operating and financial plans will be examined.

Standard & Poors, Duffs & Phelps and Moody's may also lower ratings on Sotheby's.  Duffs & Phelps notes that a purchase of former chairman Taubman's shares in whole or in part by Sotheby's could result in increased leverage and therefore have negative rating implications.  His shares, even at the currently low price, are worth in the vicinity of a quarter billion dollars.

The European Commission, the Office of Fair Trading in the United Kingdom and the Australian Competition Commission have also started to make inquiries into the alleged antitrust actions.

Shares in Sotheby's slumped to a new low for the year on Tuesday, February 22 down to 14-1/2 at one point.  The stock has recovered somewhat over the last week, although it's been a rocky road.  The stock price was at 19-1/2 as of Friday, February 25. 

In a recent article in the New York Times, Sotheby's Sovern says the federal investigations and the lawsuits would be "expensive but not life-threatening."

In the New York Times phone interview Sovern was upbeat about the investment in the Sotheby's web site, calling it "solid" and something that "would pay off."

Perhaps, but there still is a lot of work to make this site workable as I've indicated in newsletter #10 (http://www.comcat.com/~anovak/Newsletter10.htm).

Sovern, an academic with no experience in the fine art auction market and little background in art at all, claims there would be no more management changes.  And he notes that while it was too early to discuss commissions changes, Sotheby's "will not be underbid by Christie's."

Translation?  Sotheby's can't hike their rates immediately so as to add fuel to the antitrust flames, but they will as soon as possible to pay the bills for all of the legal sharks sensing blood in the water.  In the meantime rates to sellers will be sharpened up, especially as some observers are saying that the turmoil might impact prices realized and buy-in percentages.  Personally I don't subscribe to this latter point of view.  Buyers will have a bigger problem with too much on the auction market and having to pay a higher fee on their purchases--a higher fee that will, so far, impact only Christie's.

The upshot of all of these woes is that many financial and news sources are claiming that it's only inevitable Sotheby's will be sold.

In fact, England's Independent newspaper in this Sunday's edition claimed eBay would mount a $1.6 billion assault to take over the troubled Sotheby's--an unlikely scenario.

The New York Post cited a source who said French financier Bernard Arnault, who has reportedly been upset that his rival Francois Pinault controls Christie's, could be a possible buyer.

"The whole industry is talking about it and I know that investment bankers in Paris are crunching numbers over this right now," says the New York Times source.

But Bernard Arnault has already been making serious inroads in the international art auction world. Arnault is the chairman of LVMH Moet Hennessy Louis Vuitton, which bought Phillips, the world's third largest auction house, less than four months ago.  And his company's recent purchase of the French auction house Tajan (see below for more details) might signal he was ready to challenge on several fronts.  Would his purchase of Sotheby's come under antitrust scrutiny in this environment?  You bet.

A more likely suitor might be Amazon.com, who has already purchased $35 million in stocks and $10 million in stock warrants in Sotheby's in its mega deal linking the two companies.  The $10 million price for stock warrants looks more and more like a bum deal for Amazon, whose warrants entitle it to purchase an additional one million shares of Sotheby's Class A stock at a price of $100 a share.  Not something they'll be exercising any time soon.

And don't count out Disney, which has been mentioned as a suitor in the past for Sotheby's.  Andrea Van de Camp, chairman of Sotheby's West Coast, was recently reelected to the Walt Disney Company's board of directors.  And Michael D. Eisner, Chairman and CEO of Disney waxed eloquently at that board meeting about the new GO portal and Disney Internet enterprises.  Wouldn't an auction service fit just fine?

But according to an article in the New York Times, James M. Meyer, director of research at Janney Montgomery Scott, a Philadelphia-based investment firm, says the chances Sotheby's would be sold to a public company were "slim."   He suggests instead that a leveraged buyout specialist might be interested in buying it on the cheap.

As Meyer says, "As things stand now with the investigation, it's hard to believe this is the end of the story."