For US$3.7 billion, What does the Sotheby’s Sale Mean to Patrick Drahi and the Art World?

In the opaque art world, what impact does public listed Sotheby’s going private thanks to Patrick Drahi’s successful acquisition mean for the industry?

Jun 24, 2019 | By Jonathan Ho

NEW YORK, NY – JUNE 17: The Sotheby’s headquarters stands on the Upper East Side in Manhattan, June 17, 2019 in New York City. The famed auction house is being purchased by telecommunications businessman Patrick Drahi for $3.7 billion. The company announced on Monday the deal, which returns Sotheby’s to being a privately held company after 31 years on the New York Stock Exchange. (Photo by Drew Angerer/Getty Images)

Sotheby’s, one of the world’s largest auction houses and brokers of art, collectibles, jewelry and real estate, has been acquired by French-Israeli media tycoon Patrick Drahi for US$3.7 billion. Founded in England and headquartered in New York, Sotheby’s is largely recognised as a conduit for investors and collectors to realise the liquidity in the often illiquid, niche genre of rare artefacts and artworks. That said, as a corporate entity,  Sotheby’s is organised into three separate business units: finance, auctions and dealing. Hence, the sale of one of the world’s most prominent auction houses has ramifications in the industry.

Wherever rare and valuable items exist, middle men like Sotheby’s and their main rival, Christie’s will always be around to assist collectors in liquidating their illiquid assets. The relationship is at times, so opaque that in September 2000 the two auction houses agreed to settle $512 million in claims that they had engaged in a price-fixing scheme since 1992. Unlike Christie’s, Sotheby’s is publicly traded and thus bound by strict financial reporting regulations which some industry insiders felt was a major disadvantage in the opaque world of fine art. With Sotheby’s taken private thanks to Drahi’s acquisition, many felt that the English auction house could finally compete with Christie’s on equal footing.

For US$3.7 billion, What does the Sotheby’s Sale Mean to Patrick Drahi and the Art World?

Unlike commodities, alternative assets like artworks, gemstones, antiques and artisan artefacts tend to suffer from larger swings in value due to the disproportionate influence of unquantifiable elements like sentiment. Furthermore, it is not immediately clear how much revenue houses like Sotheby’s or even Christie’s really turns. In fact, since Christie’s is not required to disclose profits, publicly traded Sotheby’s is only moderately profitable with some years, particularly 2014, showing falls of profit, 15% lower, despite increasing sales. Yes, when eye-watering values are hammered for artworks like $142m for a Francis Bacon triptych or $450m for Leonardo’s ‘Salvator Mundi’, we don’t really consider the behind-the-scenes costs like seller’s guarantees which eat into the final profit margin to the house. Exacerbated by widening income gaps and the rapid growth of wealth in the hands of the ultra-rich, and the fierce competition the world’s two most recognised auction houses,

Who is Patrick Drahi?

“Most people don’t seem to know who he is.” – Private dealer Brett Gorvy to NYT

PARIS, FRANCE – APRIL 19: (FRANCE OUT) Patrick Drahi, president of french telecom group Altice at the inauguration of the Drahi-X Novation Center, dedicated to entrepreneurship and innovation, at the Ecole Polytechnique, in Palaiseau (near Paris), on tuesday, April 19, 2016. Patrick Drahi invested in the construction of the center which will be part of the Ecole Polytechnique. (Photo by Christophe Morin/IP3/Getty Images)

Indeed, when billionaire Patrick Drahi acquired the 275-year-old auction house, most in the industry did not know who he was. Notoriously private, Drahi, the son of two math teachers appears to have made his immense wealth through sure grit and intellect. Rumoured to have started with nothing but US$9,000 of student loans, Drahi forged his billionaire destiny by become a “Debt-King” sieving the market for junk-rated debt and then restructuring these failing companies, among them, what would become the second-biggest telecom company (Altice) in France. Therefore when Sotheby’s share prices had dropped almost 40% in a single year, it was exactly one of the few elements which would entice an astute investor like Drahi.

““Sotheby’s is a long-term family investment in an industry he is passionate about.” – Arthur Dreyfuss, a spokesman for Drahi

Drahi, Moroccan by birth, French, Portuguese, and Israeli, by nationality, calls the alpine town of Zermatt, Switzerland, home. The ultra-wealthy typically leave a financial trail of some sort, luxuries they have indulged, high profile real estate deals they have completed, when Drahi bought Sotheby’s for US$3.7 billion, private dealers and art collectors had literally no clue who he was or what he even bought. Everything is assumption and conjecture, for someone so passionate about art, it’s only rumoured that he owns pieces by Picasso, Matisse, Chagall, and the 19th century French masters Gericault and Delacroix.

Evening: Landscape with an Aqueduct,1818, Théodore Gericault

According to an annual report published by UBS Group AG and Art Basel, the fine art and collectibles market amounted to $67.4 billion in 2018. But beyond the rosy, brow raising appraisals and hammered final bids, fierce rivalry between Christie’s and Sotheby’s  meant that the usual 10% and 15% consignor’s fee started to be waived. In some instances, a particularly large consignment might see the auction houses offering a percentage of the hefty buyer’s premium (known as “enhanced hammer”), the net effect of this meant that the collector in question might take home much more than the final sale price. This accounts for why Sotheby’s can have a stellar year of sales but experience lower net profit growth.

Impact of the Privatisation of Sotheby’s

Christie’s, owned by Francois Pinault, the French billionaire who founded a luxury-goods empire  – Kering Group, home to Gucci and Saint Laurent, is less influenced by market sentiment since as a privately owned entity, they are under no obligation to report a brouhaha like the one Sotheby’s suffered with the 2018 Modigliani deal. Sotheby’s offered the 1917 Amedeo Modigliani painting of a reclining nude woman with a presale estimate of $150 million but when it eventually hammered for $139 million, Sotheby’s share price took a major hit.

According to Artnet: Taking Sotheby’s private “makes sense as investors have long suggested that [the auction house] is better in private hands given the vagaries of the art market and given more volatile quarterly earnings,” wrote Raymond Stochel, an analyst with Consumer Edge Research.

“The acquisition of Thread Genius and the addition of Richard, Ahmad and Andrew to the Sotheby’s  team advance a number of initiatives related to the strategic capture and use of data to improve internal processes and provide a wider range of services to clients. We have united all of our data-related activities under one umbrella, which will accelerate innovation and provide benefits to both our internal team and our clients.” – Jennifer Deason, Sotheby’s Head of Strategy & Corporate Development

Telecom and Media group Altice founder Patrick Drahi attends the inauguration of the Altice Campus in Paris on October 9, 2018. (Photo by ERIC PIERMONT / AFP) (Photo credit should read ERIC PIERMONT/AFP/Getty Images)

Meanwhile, while Drahi refused to comment on the US$3.7 billion purchase of Sotheby’s, he has communicated that he does not want to make any major changes to Sotheby’s and that current management will stay, implying a certain trust in CEO Tad Smith. Under Smith, Sotheby’s made efforts to modernise the oldest company listed on the New York Stock Exchange for the digital age – expanding digital initiatives, acquiring art advisory firm Art Agency for a reported US$85 million and, even, artificial intelligence startup Thread Genius, which has built a set of algorithms that can both instantly identify objects and then recommend images of similar objects to the viewer. Working with data scientists, Sotheby’s will soon be in possession of a powerful new AI-based recommendation engine utilising Sotheby’s intellectual property like Mei Moses Art Indices, an art database of 50,000 images that it acquired in 2016 and when combined with Orion Analytical, another  2016 acquisition, Expert Forgery-Spotter and founder James Martin, adds scientific tests including technical imaging, magnified visual inspection, elemental analysis, and molecular analysis, to a powerful suite of forgery detection tools.

Sotheby’s Chairman and chief auctioneer Peter Wilson (1913-1984) conducts a sale of Renaissance paintings at Sotheby’s auction house in London on 28th November 1963. The painting on the right is ‘Portrait Of A Young Man In Red’, by Raphael. (Photo by Les Lee/Daily Express/Hulton Archive/Getty Images)

Christie’s V. Sotheby’s

Among Sotheby’s most famous deals are the collections of the late Duchess of Windsor, the personal collection of artist Andy Warhol and Edvard Munch’s painting “The Scream”. According to UBS, Christie’s and Sotheby’s control 20% of the global art market with revenues of US$7 billion for the former and US$6.4 billion for the latter. There is a high degree of anticipation how a perceived newcomer to the art scene like Drahi will face off with long time luxury and art insider Pinault.

One thing is for certain, Sotheby’s will no longer be under pressure to continue favourable quarterly reports for its public investors, giving the world’s oldest auction house some flexibility in prioritising long-term growth and sustainability over short-term profits. This isn’t the first time public-listed Sotheby’s was taken private, it was public in the UK before being purchased by American mall magnate A. Alfred Taubman in 1983, and it became public again after Taubman had it listed once more in 1988.

 

 

 


 
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