Last Friday, Mercato's Capital's Mick Mcguire sent a letter to Sotheby's (NYSE: BID), outlining the highlights of a $500mm buyback that it wanted done immediately.
Recall that both Third Point and Marcato Capital are activists at Sotheby's. Per a 13D/A filing last week, Mick's Marcato has also been upping its stake in Sotheby's.
The activist hedge fund went from owning 5mm shares to 6.57mm. It now owns 9.5% of the company, versus its previous 7.4% stake. Meanwhile, Third Point owns 9.6%.
Below is our chopped and screwed interpretation of Mick's letter.
Basically, Mick isn't a fan of the current corporate governance and wants Sotheby's to return excess capital to shareholders. The company is currently looking for a new CEO and has suspended any capital returns for the time being.
There's also the idea that analysts simply misvalue the company by applying P/E multiples to earnings estimates. The problem is that earnings valuation doesn't take into account its cash balance, art inventory and excess equity in its loan portfolio, not to mention its real estate assets.
Mick lays out the roadmap to unlock $12+ a share of value. This includes the $500mm share buyback.
Marcato lays out the future: The fund puts together what the company should do to unlock this $12 a share in value, including getting the company to truly understand how much financial flexibility it has.
This includes a quick calculation on how much liquidity Sotheby's actually needs: 1. $300mm in standby liquidity for worst-case scenario; 2. $100mm to fund deals in the case that it offers buyers payment terms; 3. $95mm working capital. That's$495mm in needed liquidity.
Here's how much liquidity Sotheby's actually has: 1. $490mm in cash; 2. $190mm in FCF generated during 4Q14; 3. $300mm credit facility. That's $980mm in actualliquidity.
Then it can create liquidity by doing this: 1. Mortgage its London real estate and appraise its assets used for collateral on its credit facility, unlocking $162.5mm; 2. borrow $112mm against its auction segment; 3. increase its SFS loan by $54mm; 4. re-appraise the NY real estate to unlock $41mm. That's close to $370mm in potential liquidity.
So, Sotheby's could have $1350mm in liquidity, versus it's needed liquidity of just $495mm. That means there's $850mm in excess capital that Sotheby's could return to shareholders.
Consider the fact that Sotheby's market cap is just $3.1bn. Now, will the company do all these things to unlock that liquidity, doubtful, but at least the pressure is on to unlock value for shareholders -- an 18 month battle that's part of a longer-term story, making Sotheby's a long-term holding for us.