Sotheby’s, the billionaire and the reserve price

Sotheby’s is under fire for accepting a $2.7 billion takeover bid from billionaire art lover Patrick Drahi. The handling of the sale reflects poorly on the board, even if it led to a generous offer relative to where the stock was trading.
The venerable auctioneer received a takeover approach from a group of unidentified private equity investors in December. Others, including Drahi, followed. As the shares fell from nearly $60 in the middle of 2018 to less than $40 by the year-end, the board should have been on alert to repel opportunistic approaches. It doesn’t look that way judging by the timeline set out in Sotheby’s regulatory filings.
The buyout consortium said it thought the auctioneer was worth a mere $50 a share. The board rejected this — but without much conviction. In fact, it offered bidder help to raise the price. That would have given the impression Sotheby’s was keen to sell itself. Doubtless encouraged by the board’s friendly rejection, the private equity group raised its offer to a still ungenerous $52.50 a share in May.
Meanwhile, Drahi and a host of others were sniffing around. Board members discussed the correct price for any deal, but they couldn’t agree. The designated director for Sotheby’s biggest shareholder, Chinese insurer Taikang Asset Management, suggested $100 a share.
Sotheby’s lowered its target to $57.50 a share. An intermediary was told that Third Point LLC, an activist that owns 14 percent of the company and controls several board seats, was ready to sell at the right price. Drahi called the board’s bluff once more, returning with a $57 a share offer in June.
Sotheby’s buckled and also agreed to pay Drahi $111 million if a gatecrasher came along. His offer was at a big 61 percent premium to then share price, but largely because the stock had fallen further.
Obviously boards should have diverse opinions. Still, couldn’t Soth-eby’s have come to a solid view of what it was worth and stuck to it? If some directors think the company is worth $65 a share — barely above where the shares traded last year — why was it backing this deal? Or was that number a tactical ploy? As unhappy UK shareholder RWC Partners notes, the auctioneer only used the more pessimistic of its internal financial forecasts as it weighed up its future as an independent company.
The board was at least right not to try to get an auction going or solicit a firm offer from Taikang: it’s far from certain a Chinese bidder would be able to complete a deal. Above all, Sotheby’s shouldn’t have been actively trying to sell itself in the face of bad offers.
If a deal is too cheap, an auction will follow. The snag here is that the break fee adds to the cost of any counter-bid. At 3 percent of Sotheby’s enterprise value, it is unhelpful to shareholders but not
an insurmountable obstacle. The board’s tactics could yet be vindicated if an auction gets going.

—Bloomberg