Cowen analysts think Marcato’s call for $500 million in share repurchases right now is unreasonable

Sothebys continues to be a favorite target of activist investors, as first Dan Loeb and now Marcato Capital push for changes at the auction firm. Both activists have been critical of Sothebys management, with Marcato being the latest to speak out. The new CEO will certainly have his hands full in dealing with all this pressure from some of the firm’s latest shareholders.

How much capital could Sothebys return?

Last week Marcato Capital demanded that Sothebys immediately buy back $500 million worth of shares. The firm holds about a 9.5% stake in the auction company, which makes it the second biggest shareholder.

But could Sothebys reasonably buy back $500 million worth of shares in a short time frame? In a report dated Feb. 25, Cowen and Company analyst Oliver Chen and his team say probably not. In their estimates, the firm may only be able to repurchase between $150 million and $200 million worth of shares safely. That’s approximately 5% to 7% of the firm’s market capitalization.

They base that estimate on Sothebys’ current $884 million liquidity and the current $323 million that’s still undrawn on its revolving credit line. They subtract about $515 million operating reserve and $200 million in financial covenant requirements.

Sothebys

Should Sothebys’ CFO be ousted?

Marcato also demanded the ouster of Chief Financial Officer Patrick McClymont, who has been in that position for less than a year. The Cowen team also disagrees with Marcato’s demand that McClymont be replaced because they think it’s just too early to judge whether he is making the necessary changes to put the company back on track.

So far, the Cowen analysts actually like what McClymont is doing at Sothebys.

What about the new CEO?

In terms of where Sothebys should go next, the Cowen team suggests the new CEO should look to cut down the firm’s “actuarial vulnerability and volatility to auction revenue growth and margins.” They would also like to see the new CEO better leverage the Sothebys brand around the globe while also emphasizing the search for new customers.

They point out that the new CEO will have to be able to take the firm through some important strategic decisions, like growing the private sales division, generating new revenue sources, continuing to return capital to shareholders and possibly monetizing the firm’s real estate in London and New York City.

The Cowen team maintains its Market Perform rating and $45 per share price target on Sothebys.

As of this writing, shares of Sothebys were down by 0.36% to $44.41 per share.