If you enjoy the finer things in life, then you’ll love the action taking place in the specialty retail market. Great paintings, sculptures and fine jewelry are not only to be appreciated, but they can make for great investments as well.
We’ve already seen one shake-up in the specialty retail industry this year. Billionaire John Paulson is taking famous piano maker Steinway Musical Instruments private for $512 million. The bidding war between Paulson, private equity firm Kohlberg & Co. and Samick Musical Instruments has driven Steinway’s stock up 90% this year.
While Paulson is a fan of pianos, it’s no secret that billionaire and activist investor Daniel Loeb loves art. He is said to have various pieces of art hanging in his Park Avenue office and enjoys going to art shows.
Loeb and his Third Point hedge fund are coming off one of their biggest wins after helping turn around Yahoo! Inc. (NASDAQ:YHOO). Loeb sold two-thirds of his position back in July when the stock was trading around $25, locking in a cool half-billion dollars in profits.
Now Loeb’s looking to put that capital to work in other markets, with the art market being a perfect candidate. Loeb and his Third Point hedge fund have started their latest activist campaign with leading auction house Sothebys (NYSE:BID). Loeb joins fellow activist investor Marcato Capital in the stock.
Marcato now owns 6.6% of the company, and Third Point owns 5.7%. Third Point and Marcato join billionaire and notable activist investor Nelson Peltz’s Trian Fund Management, which owned 3% of Sotheby’s as of the end of the second quarter.
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| Sotheby’s headquarters in New York City. |
So what are these billionaires and activists expecting to get out of Sothebys (NYSE:BID)? Are they after the real estate value? Is the company grossly undervalued? Are they playing the expected rebound in art sales? Will they push the company to boost shareholder returns?
The hedge funds involved have kept their public statements vague, and while none of the activists involved has outlined his plans for the stock, it’s safe to say there is value in the company that needs unlocking.
Part of Sothebys (NYSE:BID) moat is its unrivaled name recognition. For those who don’t know, Sotheby’s is an auctioneer of specialty retail items, which includes fine art, antiques, jewelry and other collectible items. Its roots date to 1744, when it was founded in London.
With the industry being niche, and the fact that Sothebys (NYSE:BID) is the only major publicly traded auction house, relative valuation is next to impossible. However, from a historical valuation perspective, Sotheby’s does not look all that appealing. The stock is trading at near-decade highs on price-to-earnings (P/E), price-to-sales and price-to-book bases.
Thus, there will need to be a catalyst to drive the stock higher. Here are a few possibilities these activist investors could be looking at to unlock value.
Economic Expansion
Sothebys (NYSE:BID) took quite a nasty spill along with the broader economy back in 2008, trading below $9 per share before rebounding to the over $45 it trades at today. As income levels rise and the broader economy strengthens, the demand for the finer things in life, such as art, should also rebound. The company’s underlying reliance on the economy is exhibited by the stock’s 2.7 beta.
Although the expected boost in sales and earnings, due to a rebounding economy, will likely boost the share price, that’s not the sole reason for the activists’ investing. Activists generally get involved for something more than market-moving events. They look to generate their own alpha through management shakeups, strategy realignment, balance sheet restructuring, and so on.
Real Estate
The big news of late, in addition to the activist campaigns, is that Sotheby’s is planning to sell its New York headquarters. Stifel Nicolaus has said that those real estate properties could hold unrealized value for Sotheby’s, noting that the New York and London properties might be worth $300 million more than is carried on the balance sheet.
