Loeb Gains Proxy Adviser Support in Sotheby’s Fight Over Board

Apr 24, 2014 2:34 pm ET

April 24 (Bloomberg) -- Activist investor Daniel Loeb gained an important ally in his fight with Sotheby’s after a shareholder advisory firm backed his proposal for investors to vote for two of his three nominees to the auction house’s board.

The report issued today by the influential Institutional Shareholder Services isn’t binding and comes a day after Sotheby’s reported preliminary first-quarter earnings ahead of its annual shareholder meeting on May 6. Loeb and the auction house have been lobbying investors to vote for their competing slate of directors who are to be selected at the meeting.

Loeb’s Third Point LLC., which has criticized Sotheby’s management and its financial performance relative to rival Christie’s for months, wants to inject new leadership into what it called a “dysfunctional corporate culture” at the prestigious New York-based auction house. Third Point, which oversees $14 billion, is the largest shareholder of Sotheby’s with a 9.5 percent stake.

A Loeb victory will “send a clear message that changes need to be made,” said Jeff Rabin, co-founder of investment adviser Artvest Partners LLC and former vice president of financial services at Christie’s. “The real question is how long it will take. I don’t think it’s as quick a turnaround as some might think.”

Sotheby’s shares rose 5.5 percent to $42.89 today in New York trading, narrowing the decline this year to 20 percent.

Court Hearing

Sotheby’s and Third Point will also face off in Delaware Chancery Court on April 29. Loeb sued the board in March seeking to overturn a poison pill that would be triggered when an activist obtains 10 percent of the auction house’s stock. New York-based Third Point said the poison pill, normally used as a takeover defense, is being used to maintain the status quo.

Sotheby’s yesterday said losses in the first quarter narrowed from the year earlier period. The company said it expects to report a pretax loss of $6 million, down 81 percent from $32 million a year earlier. Sotheby’s attributed the results to an increase in sales of Impressionist and contemporary art. Full results are set to be released about May 7, the company said.

Two Nominees

ISS said shareholders should vote for Loeb, chief executive officer of Third Point, and jewelry designer Olivier Reza because they are active art collectors. Loeb “brings the sort of deep financial and analytic acumen” the Sotheby’s board needs, ISS said in its report. Loeb’s third nominee is Harry Wilson, who helped restructure General Motors Co.

Marcato Capital Management LLC, the $2.7 billion activist hedge-fund firm run by Mick McGuire and which owns 6.6 percent of the auction house’s shares, plans to vote for all three of Third Point’s nominees.

ISS said Loeb presented a “compelling case” that Sotheby’s financial performance is “substantially worse than its own record would suggest is possible” and that “it appears that introducing some change into the boardroom is warranted.”

In an April 4 letter to Sotheby’s shareholders, Loeb said the auction house lacked discipline in reducing costs, writing that “the culture of access has returned.” ISS agreed, saying in its report that the board’s “assertion that expenses have grown an average of 0.5% per year since 2007 is deeply disingenuous: when the financial crisis hit, the company responded by cutting operating expense by 30 percent. Since then, however, it has added back all that expense and then some.”

Strategic Plan

Third Point declined to immediately comment on the ISS report and said it would have a letter for Sotheby’s shareholders later today.

Sotheby’s said today in a statement that “now is not the time to diverge from Sotheby’s leadership and its strategic plan.”

“We believe that Sotheby’s shareholders should vote for all of Sotheby’s director nominees,” the auction house said.

Sotheby’s said it already has an “independent, active, engaged and focused” board and that Loeb “has made no case that change is warranted.” It said Loeb and Reza “add no relevant expertise that is not already effectively represented.”

The first quarter results “demonstrate that we are executing on our strategic plan and are well positioned to further build on the substantial momentum and record results we achieved in 2013,” Bill Ruprecht, Sotheby’s chief executive officer and chairman, said in yesterday’s earnings statement.

May Sales

Sotheby’s typically posts a loss or small profit in the first and third quarters and a larger gain in the second and fourth periods, when its biggest semi-annual auctions are held.

Its marquee Impressionist and modern art evening sale in New York is set for May 7 and its contemporary-art sale is scheduled for May 14.

The company said it expects to report net auction sales of about $730 million in the first quarter, a 40 percent increase from the year earlier.

Sotheby’s evening sale of Impressionist and modern art in London in February tallied 163.5 million pounds ($274.37 million), up 57 percent from a year before and surpassing its high presale estimate of 128.4 million pounds. Of 89 offered lots, only 10 failed to find buyers, Sotheby’s said. The auction house’s contemporary art sale in London the same month tallied 87.9 million pounds, an 18 percent increase from a year earlier.

--With assistance from Kelly Bit and Stephanie Ruhle in New York and Phil Milford in Wilmington, Delaware.