Top Hedge Funds In Bid to Shape Up Sotheby’s Auction

Activist hedge fund  investors are in the house—the auction house, that is.

Sotheby-hedge-fundGlobal art auctioneer Sotheby’s BID +1.98% announced that its board of directors would review its capital allocation and financial policies, with results expected in early 2014.
The company hinted it may take actions that could mean bigger payouts to shareholders via share buybacks or dividends.

Richard Mick McGuire Marcato Capital Management

Richard Mick McGuire Marcato Capital Management

The announcement comes after activist hedge fund  manager Richard McGuire’s Marcato Capital Management LLC boosted its stake in the company over the summer to 6.7%, according to an Aug. 29 filing, making it the second-largest shareholder in Sotheby’s.
Hedge fund hot shot Daniel Loeb, seen last year, raised his stake in Sotheby’s in August.

Daniel Loeb‘s hedge fund Third Point LLC also raised its stake in the company over the summer, to 5.7%, according to a securities filing. And Nelson Peltz’s Trian Fund Management LP also has bought a large stake, with more than 3% of the company, according to a filing.

In a securities filing, Dan Loeb said he planned to speak with members of Sotheby’s board or management about the possibility of altering the company’s strategy or leadership.

The stock purchase isn’t Mr. Loeb’s first transaction with Sotheby’s. In 2009, he used the auction house to sell an egg sculpture by contemporary artist Jeff Koons for $5.5 million.

Hedge funds at these events typically speak about their investment ideas, though it wasn’t known what Mr. McGuire was planning to discuss.

In Wednesday’s statement, Sotheby’s Chief Executive Bill Ruprecht said that the company may consider taking on more debt to fund its operations in the context of boosting buybacks or dividends.

On the company’s most recent earnings call, on Aug. 6, Mr. Ruprecht said Sotheby’s was assessing the value of its York Avenue headquarters in Manhattan. He said the company had no current plans to relocate, but said it was exploring alternatives within the city.

Activist hedge fund  investors have targeted several companies with valuable real-estate holdings this year, often pushing for the companies to use the properties to raise cash or value for shareholders.

Sotheby’s spokesman Andrew Gully said on Wednesday that the review “is a natural next step for the board as part of the continuing evaluation of the organization, our needs and opportunities, and attention to shareholder value.”

Sotheby’s business took a dive during the recession, recovered sharply in the following years, and recently has been more mixed. The company said its profit fell 37% last year to $108 million, as revenue dropped 8% to $768 million.

Many activist investors make their demands for change publicly. Loeb created a Website during his battle with Yahoo (YHOO.O) and releases his missives to management in filings.

Dan Loeb

Dan Loeb

And up until now, even Loeb, who has an impressive art collection, has been calm in this fight, saying only that he planned to “engage in a dialogue” with Sotheby’s.

At Marcato Capital Management in San Francisco, McGuire does most of the work himself, including calling up chief executives at target companies and creating the 100-slide power-point presentations made famous by his former boss Bill Ackman.

Bets on real estate and agribusiness company Alexander & Baldwin (ALEX.N), and DineEquity (DIN.N), which operates fast food restaurants IHOP and Applebee’s, have been winners.

This year, Marcato Capital Management is up 17.1 percent, keeping pace with the Standard & Poor’s 500 Index and handily beating the average hedge fund’s 7 percent rise, said a person familiar with the returns. Last year, it rose 29 percent while the average hedge fund gained 7 percent.

In Sotheby’s, McGuire and others found a one-of-a-kind business that has been largely ignored by Wall Street analysts and is still smarting from the effects of a price-fixing scheme with rival Christie’s two decades ago. Sotheby’s paid a $45 million fine in the criminal case and its former chairman, Alfred Taubman, went to prison.

Even as Sotheby’s made blockbuster sales such as last year’s $120 million auction of Edvard Munch’s “The Scream,” several shareholders worried about a lack of urgency at the top levels.

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