In the annals of art auction guarantees for a single consignor, this one may well set a record.
In its Form 8-K SEC filing yesterday, Sotheby’s reported this about its upcoming sales of more than 500 works from the estate of its former chairman, A. Alfred Taubman:
On Sept. 2, 2015, Sotheby’s entered into an arrangement with the Estate of A. Alfred Taubman (“the Estate”) under which Sotheby’s will sell works of art from the collection of A. Alfred Taubman at auctions expected to occur primarily in November 2015 and also in early 2016. Robert S. Taubman, a director of the Company, is a trustee and beneficiary of the Estate.
The collection is estimated to be worth in excess of $500 million. In connection with this arrangement, Sotheby’s agreed to provide an auction guarantee for the collection at approximately that level [emphasis added].
That said, Sotheby’s may “reduce its exposure under the auction guarantee by entering into risk and reward sharing arrangements [i.e., third-party guarantees, irrevocable bids, etc.] prior to the auctions at which the Estate’s collection is offered.”
Robert Taubman, Alfred’s son, “played no role” in “consideration or approval” of the Estate’s agreement with Sotheby’s, but “is no longer [an] independent [director of the company] under New York Stock Exchange rules and standards,” as the 8-K states. He will, however, continue to be a member of the board.
Sotheby’s had set the stage for this and other potential mega-consignments in 2014, by doubling from $300 million to $600 million its cap for “net outstanding auction guarantees” (the value of the guarantees after deducting the impact of related risk- and reward-sharing arrangements, such as third-party guarantees).
As of July 30, 2015, according to Sotheby’s latest quarterly report, the auction house had outstanding auction guarantees totaling only $3.8 million, largely offset by risk- and reward-sharing arrangements totaling $3.3 million.
You don’t need a very long memory to remember when guarantee risks went badly awry.
As I wrote in November 2008, at the time of the Great Recession, Sotheby’s suffered a $28.2-million loss on contemporary art guarantees that month, when the auction house’s Form 8-K noted this:
In light of the current uncertainty in the global economy and volatility in the financial markets [emphasis added], the Company expects to continue to substantially reduce its use of auction guarantees until stability is restored in the global economy and financial markets.
“Current uncertainty in the global economy and volatility in the financial market” (particularly in China, a leading art-market player) could well describe the situation during the coming months. Depending on how well Sotheby’s succeeds in getting third parties to assume its guarantee risks, it could have an anxious third quarter.