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    Auction Houses Seek Strategy To Counter Seller Pressures

    In nearly every art category, from Chinese ceramics to contemporary art, new records were set at auction houses last year. Sotheby’s reports total sales of $2.66 billion for 2004, a big increase from the $1.69 billion the house registered in 2003. Christie’s has not yet released its 2004 figures, but it led the market in 2003

    NEW YORK—In nearly every art category, from Chinese ceramics to contemporary art, new records were set at auction houses last year.

    Sotheby’s reports total sales of $2.66 billion for 2004, a big increase from the $1.69 billion the house registered in 2003. Christie’s has not yet released its 2004 figures, but it led the market in 2003 with a $2 billion total.

    Last month, to bolster the bottom line, both houses announced increases in the buyer’s commission, effective this month. (The buyer’s commission, or premium, is the fee tacked on to every buyer’s final, winning bid, and is a major source of revenue for the houses, especially on big-ticket items.)

    Christie’s went first, announcing that the 19.5 percent commission charged on the first $100,000 spent at auction would inch up to 20 percent (the charge remains at 12 percent on anything above $100,000). This change—which translates to an increase of $500 on lots over $100,000—brought Christie’s commission equal to Sotheby’s.

    Less than two weeks later, Sotheby’s raised its commission even higher, charging a 20 percent commission on the first $200,000 (not just the first $100,000) and 12 percent thereafter.

    Last week, on Jan. 13, 2005, Christie’s announced a new buyer’s premium, matching the new rates set by Sotheby’s, effective Jan. 17. Under the previous commission structures, a buyer who won a painting with a final bid of $290,000, also known as the hammer price, would pay a total of $332,800 with commission. Under the new pricing structure, the cost including commission would now be $340,800, a difference of $8,000.

    Marc Porter, president of Christie’s North America, told ARTnewsletter, “The presumption that if Sotheby’s raises their commission, that we would follow in lockstep, is not correct. In fact, each of our pricing decisions is an independent business decision weighting numerous criteria.”

    The new increases are an attempt to compensate for the loss of a seller’s commission. In the past decade, sellers have become bolder about making demands on the houses, to the point that today the seller of an important work expects a sweetheart deal sans seller’s commission. Furthermore, besides asking for a favorable seller’s rate, some consignors reportedly have begun to demand a cut of the auction house’s buyer’s premium.

    So, it has become imperative for the houses to figure out how to improve both their revenues and their historically slim margins. Another factor is the houses’ little-known practice of frequently paying “introductory commissions,” or finders’ fees, to dealers, advisers and others who steer a seller to a particular house.

    Previously that money came from the seller’s commission. Today, with fewer sellers paying commissions, the introductory commission comes out of the buyer’s premium and thus cuts further into the auctioneer’s bottom line.

    Besides, because the market is essentially a duopoly, Sotheby’s and Christie’s are often at the mercy of any collector with great goods. “They try not to give away too much on the seller’s side, and the unfortunate reality is that they sometimes have to give away everything to get major pieces,” says art adviser Wendy Cromwell, a former Sotheby’s art specialist. “The only way they can make up a little is to increase the buyer’s premium.”

    On Nov. 9, during a third-quarter earnings conference call with industry analysts and investors, Sotheby’s CEO William Ruprecht and CFO William Sheridan faced tough questions about climbing costs. Investors complained about compensation and the increasing number of guarantees given to sellers. (Unlike Christie’s, Sotheby’s is publicly held and therefore must disclose detailed financial information each quarter.)

    Investors were particularly rankled by Sotheby’s deal with one collector, Hester Diamond, widow of dealer Harold Diamond, whose collection hit the block Nov. 4. Two of her major paintings—a Wassily Kandinsky Sketch for Deluge II, estimated at $20/30 million, and a work by Pablo Picasso, Baigneur et baigneuses, pegged at $8/12 million—failed to sell. Yet Sotheby’s was forced to pay an undisclosed amount of money to Diamond because the works were guaranteed (see ANL, 11/23/04).

    Sotheby’s disagreed with investors who called the November high-profile Impressionist and modern art auction (see ANL, 11/23/04) a financial flop. “After you write those assets down,” Ruprecht told investors during their conference call, “you still have a profitable sale.”

    During last fall’s auction season, both Sotheby’s and Christie’s said, the level of financial guarantees made to sellers was higher than in previous seasons. The trend is likely to continue in the months ahead. “The market is more and more competitive, and to keep up with it, we have to offer increasingly creative financial incentives,” explains Andree Corroon, Christie’s head of public relations.

    “We have been very pleased with our overall success rate on guarantees in the many years we have been providing them, including 2004, and we will continue to provide them when appropriate in the future,” says Diana Phillips, Sotheby’s head of public relations.

    In the past year Sotheby’s has taken several steps to strengthen its balance sheet, including the sale of its American real estate business to Cendant, which added $100 million to the bottom line (see ANL, 3/2/04). The firm also raised cash when it sold its York Avenue headquarters in Manhattan to RFR Holdings and arranged to lease the building back.

    Additionally some high-profile sales—the famous trove of Fabergé eggs and the equally impressive collection of Impressionist and modern paintings from the Mr. and Mrs. John Hay Whitney family collection—gave the company a big boost (see ANL, 2/3/04).

    In general those moves seem to have paid off. Sotheby’s share price increased about 30 percent in 2004, from $14 to $18, well above the market average. As ARTnewsletter went to press, the stock closed at $17.12, on Jan. 13, down 17 cents.

    Says research analyst Bob Goldsborough of Chicago-based Ariel Capital Management: “The auction market rebounded quite nicely this year, and Sotheby’s did a fine job of getting some of the most trophylike properties to auction. Everything went their way this year.” Ariel, with about 9.55 million shares, is Sotheby’s largest institutional investor.

    Goldsborough says he is particularly heartened by Sotheby’s efforts to settle its debt. Noting that the last of the retention bonuses has been paid, he adds, “It’s been a good year. As investors we’re really pleased.”

    Stockholders inside the company are taking advantage of the run-up in price. According to the Securities and Exchange Commission (SEC) filings listed on the company’s Web site, members of Sotheby’s board and management have been selling from their own stockpiles of shares.

    On Dec. 16, the day after he sent an e-mail notifying staff and investors of the increase in commissions, Sotheby’s Ruprecht sold off shares totaling approximately $183,925. He was not alone: The president of Sotheby’s Financial Services, Mitchell Zuckerman, sold shares amounting to about $819,000; the head of Sotheby’s Asia and Europe, Robin Woodhead, close to $459,000; and the company’s head lawyer, Donaldson Pillsbury, about $92,000.

    The sales proceeds for the aforementioned individuals may represent pure profit if the shares sold were from an award of stock, or something less than pure profit if the shares sold were through the exercise of an option.