U.S. Markets close in 1 hr 20 mins

Daniel Loeb Boosts Stake in Sotheby's

Zacks Equity Research

Daniel Loeb, the founder of Third Point LLC hedge fund, announced last week that it has increased its stake in Sotheby’s (BID). Daniel Loeb now holds approximately 6.35 million shares or a 9.3% stake in Sotheby’s, up from a 5.7% stake disclosed in August this year. This makes Loeb the largest shareholder of the company.

Subsequently, Third Point, which manages assets for Third Point Reinsurance Ltd (TPRE), wrote to Sotheby’s expressing its concern about the company’s strategies and managerial practices. Moreover, Third Point asked for a seat in the board of directors and demanded Sotheby’s present Chairman and CEO Bill Ruprecht to step down.

Just two days after Daniel Loeb’s public criticism, the 269-year old auction house Sotheby’s adopted a poison pill to protect itself against hostile or any other takeover tactics. Sotheby’s revealed that the new shareholder right plan will prevent any single owner to own more than 10% stake (with certain exceptions) in the company.

Apart from this, the scheme also provides a preferred share purchase right as dividend for each outstanding share of Sotheby’s stock. The exercise price of this preferred stock has been kept at $200, making any takeover attempt more complex. Per the company, the strategic action has been taken after noticing that its outstanding shares were rapidly accumulated in recent times.

Of late, Sotheby’s is witnessing persistently weak operating margins and deteriorating market position against its arch-rival, Christie’s. Moreover, Sotheby’s businesses have also been hurt by Internet retailers such as Amazon.com Inc. (AMZN) and eBay Inc. (EBAY) offering auctions in their websites.

Despite consistent weak performances, Sotheby’s shares have surged nearly 47% year to date. We believe that the movement in this stock’s share prices is much due to many private equity firms aggressively increasing their stakes in Sotheby’s. In the beginning of this year, billionaire Nelson Peltz acquired 3% stake, while hedge fund manager Mark McGuire of Marcato Capital Management bought 6.6% stake in Sotheby’s in August.

Sotheby’s exists in more-or-less a duopoly market and thus private firms or individuals have keen interest in the company. A revival in its market share and profit will be a lucrative option for any investors looking to takeover the auction house. However, the present management is in no mood to let the company go from its hands and thus trying every means to thwart takeover bids.

Sotheby’s currently carries a Zacks Rank #3 (Hold).

Read the Full Research Report on BID
Read the Full Research Report on TPRE
Read the Full Research Report on AMZN
Read the Full Research Report on EBAY

Zacks Investment Research