Auction High-Wire Act Without a Net: Sotheby’s Daredevil Taubman Guarantee

More on this here and  here.

This is a watershed moment for Sotheby’s and its new CEO, Tad Smith.

When I heard the astonishing news in September that Sotheby’s had provided the Taubman Collection‘s consignors with a guarantee of approximately $500 million for some 500 works, ancient-to-contemporary, I assumed that the auction house would make strenuous efforts to offload large portions of that hefty risk to third parties.

But comments to me by several Sotheby’s officials indicate that this risk-sharing hasn’t happened.

In its Form 8-K SEC filing, Sotheby’s stated that it might (as one would expect) try to “reduce its exposure under the [Taubman] 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.”

[Guarantees are amounts promised by the auction house to some consignors, whether or not the bidding actually reaches the level of the guarantee. If the bidding exceeds the level of the guarantee, the auction house typically receives a sizable portion of the excess amount or shares its portion with third-party guarantors, if any.]

Robin Pogrebin of the NY Times recently reported in her piece on the Taubman sales that “Sotheby’s declined to say whether it has been able to share some of that financial commitment with third-party guarantors.” A press spokesman whom I contacted would say only that there were no irrevocable bids at this writing. She did not respond to my repeated queries as to whether there were any third-party guarantees.

But George Wachter, the auction house’s co-chairman for old master paintings, and David Norman, co-chairman for Impressionist and modern art, separately told me that they didn’t know of any third-party guarantees for the Taubman works. And both said they believed that if there were such outside involvement, they would know about it.

Here what Simon Shaw, co-head of Impressionist and modern art, told me regarding this:

ROSENBAUM: Isn’t it unusual to do a $500-million guarantee, thereabouts, without any third-party backing? Wouldn’t you have tried to get someone to undertake some of that risk?

SHAW: We’re really happy with the deal we have made for the Taubman Collection. We’re really excited about selling it….

As you know, we have a certain pool of money [emphasis added] to put into guarantees. We’ll have quite a chunk left over after doing Taubman. That’s just the way it came together this season.

The “pool of money” to which Shaw was referring (disclosed in the above-linked 8-K) is an unprecedented $800-million-dollar line of credit, earmarked for financing Sotheby’s auction guarantees. This was increased on Sept. 16 from $600 million—a level that was set in 2014, which doubled the previous $300-million line of credit.

Sotheby’s aggressive push to snare megabucks consignments was signaled by Tad Smith, Sotheby’s new president and CEO, in his May conference call with stock analysts. Acknowledging competitive pressure and shareholder desire for Sotheby’s to “address market-share gaps,” he announced a new “growth strategy” that included “improving our consignment-hedging strategies.”

Smith added:

We are committed to making every effort to hedge these risks [from guarantees] through partners, to ensure that our shareholders’ money is well deployed to generate a return. We will not roll dice in the auction room with shareholders’ money. At the same time, guarantees on high-profile trophy lots can be important marketing investments and potentially generate positive momentum and product scope within certain art categories.

Strategy, opportunity, judgment and sensible risk management will guide our use of these guarantees. [Emphases added]

According to Sotheby’s initial press release announcing the Taubman sale, “proceeds…will be used to settle estate tax obligations and fund the A. Alfred Taubman Foundation.” Sotheby’s has estimated that the Taubman trove will bring $500 million or more. If this estimate is on-the-money (or, better yet, conservative), there’s not much risk to a $500-million guarantee.

There’s a lot riding their being right: Not only the auction house’s financial well-being and stock price, but also its professional reputation are potentially at stake.

Smith assured both Bloomberg‘s Katya Kazakina and the NY Times‘ Robin Pogrebin that winning the Taubman consignment (for which Christie’s had competed) was good for the shareholders of his publicly traded firm. That will only be true, though, if the gamble proves profitable

Interestingly, Brett Gorvy, chairman for postwar and contemporary art at Christie’s (whose department is largely responsible for the “market gap” referred to by Smith of Sotheby’s), seems to be dialing back on guarantees this season.

Here’s what Gorvy told me on Friday:

Last season we had a much larger portfolio of works that we guaranteed and we also had many more third-party guarantors. [A Christie’s spokesperson told me that there is a total of 37 guarantees for this month’s three evening sales.] This season, we were focusing on being very proactive on certain objects, but ultimately we’re looking for things on which we felt we would be doing very well and for which we would hold the guarantee for ourselves, in many cases….

What we saw in May was that many owners believed that their works were masterpieces, even though maybe they weren’t. Just because a Warhol makes “X” doesn’t make every Warhol worth that value. So we had to be very judicious about what types of works we went after.

There was a sense after the May sales that every consignor wanted top dollar and we decided in the end to go for material that we truly believed in ourselves. We hope we got our positions right. But ultimately, you can’t just be led each time by your seller, who says we want this amount of money and you therefore are basically give them that money.

You have to be judicious. So it’s not that we were holding back. We were just being more realistic about where we believed the market was.

Sotheby’s Taubman series kicks off on Wednesday (tomorrow) with what is arguably its most important sale, Masterworks, which should set the tone for disposals of the rest of the holdings of the late shopping mall and real estate magnate, whose tarnished image Sotheby’s is now trying to polish.

As Sotheby’s ex-chairman, A. Alfred Taubman went to jail for his involvement in illegal price-fixing collusion between the Big Two auction houses. But I saw him back at his old stomping grounds some years later, as ebullient as ever:

Here’s my own wishlist (if only!) from Wednesday’s “Masterworks” sale. The first one, a chalk drawing, has an astonishing provenance—acquired by Justin Thannhauser by 1939, sold by the Metropolitan Museum (!?!) in 1983.

All photos by Lee Rosenbaum: