Sothebys Capital Allocation Framework Is Comprehensive: Citi

Sothebys (NYSE:BID) announced a package of measures yesterday to assuage demands from shareholders for better returns.

“Sothebys is returning meaningful capital to our shareholders now and in the future, and establishing a framework that puts the Company in the strongest position to compete and win in this marketplace while delivering value to our clients,” declared Bill Ruprecht, President and CEO, on Sothebys’ Capital Allocation and Financial Policies Review Conference Call.

Sothebys’ action plan

Broadly, the venerable auctioneer plans to split its operations into two distinct divisions, one comprising its art auctions and direct sales, the other its niche art financing business.

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The restructuring would allow the auctioneer to save $22M in administrative costs as well as professional fees.

The company is also reviewing its prime real estate in East Manhattan and on Bond Street London and may sell portions or all of these buildings.

The company plans to return as much as $325M to shareholders during 2014 through dividends and buybacks.

Sothebys’ package in a nutshell

Separating auction and financial services

“The separation of Sothebys (NYSE:BID)’s core Auction & Private Sale business from Sotheby’s Financial Services (SFS) will allow for better monitoring using more specific financial thresholds and through leveraged financing, could unlock up to $150-200mm or $2.20-$2.90 per share in value,” estimate Citi analysts Oliver Chen, Nancy Hilliker and Maryana Pleskanka in their research note on Sotheby’s plans.

The analysts also note that Sothebys (NYSE:BID) may be able to grow the stand-alone financial services business “as a competitive weapon,” and use its capital opportunistically in the race to win higher market share.

Liquidity planning

Sothebys liquidty-plan Sothebys

The above slide shows how Sothebys (NYSE:BID) plans to generate the liquid cash it proposes to return to shareholders in 2014 through a special dividend of $300M and buyback of $25M.

Real estate portfolio

2a-re Sothebys

During the conference call the CFO mentioned that its review of the New York RE was nearing completion, and it had been established that the company had surplus space. “Therefore, we are looking at alternative locations in New York City with less space and also are considering alternatives to remain on New York Avenue but no longer occupy up to half of our building,” he said. A similar review was underfoot in London.

Longer-term

Over the long-term, Sothebys (NYSE:BID) promised that any excess cash would be returned to shareholders through special dividends.

3-longterm-framework Sothebys