In light of activist hedge fund Third Point’s legal action in regards to questioning the legality of Sotheby’s (NYSE:BID) poison pill measure, Stifel Nicolaus reiterated their Buy rating and $65 price target.
Legal opinion aside, fundamentals look good for Sotheby’s
The research report does not take a legal opinion on the merits of Third Point’s claims, but notes the positives, saying at a minimum hedge fund manager Loeb’s desire to control 20% of the stock is good for investors just based on the supply and demand equilibrium in the market. Based on the fund’s recent 13D filing, Loeb currently controls 6,650,000 shares, a 9.62% stake, and was blocked by Sotheby’s (NYSE:BID) poison pill provision in his attempts to garner additional shares.
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Poison pills distort markets
“Poison pills are most often a distortion of the market (corporations are not sovereign democracies),” the report noted. “But they are historically accepted as (A) ways to protect companies from unwanted corporate takeovers (not historically from activist investors), and (B) are best justified (in our opinion) to protect the long term (10-100+ year) interests of the company and brand from a private equity buyer with a short term (5-7 year) time horizon (taking advantage of a temporary mis-pricing in the market). Activist investors generally have a shorter horizon than private equity (they can sell any time in the open market) – so from this (non-legal) perspective, a poison pill for activism would also make sense.”
Noting that they Sotheby’s (NYSE:BID) was “an undervalued brand and business given the competitive barriers to entry that exist,” Stifil noted a positive price / earnings of approximately 17.7 times 2014 earnings and 14.7 times 2015. “Given there is some ‘alpha’ in owned real estate versus cost (value listed on balance sheet) the company is perhaps 10-20%+ cheaper than this,” the report noted.
However, risks remain, Stifil noted. These include a meaningful slowing of the art market, no reversal in higher competitive activity between Sotheby’s and Christie’s, and “the publicity of the shareholder battles affecting Sotheby’s competitive positioning.”
Sotheby’s (NYSE:BID) is one of the world’s two largest auctioneers of fine art, decorative art, antiques, jewelry, and collectibles, with operations dating back to 1744.