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Top hedge fund in bid to shape up Sotheby's

Staff members chat during Sotheby's preview in Hong Kong April 2, 2013. REUTERS/Bobby Yip
Staff members chat during Sotheby's preview in Hong Kong April 2, 2013. REUTERS/Bobby Yip

By Svea Herbst-Bayliss

BOSTON (Reuters) - Hedge fund manager Mick McGuire is not an art collector and has never felt the thrill of bidding in a Sotheby's auction, where adrenaline spikes with each multimillion-dollar sale of a Cezanne, Rothko or Picasso.

Still, he has ideas on how the 269-year-old auction house might do better for shareholders, and since June has built up a 7 percent stake to allow him to take some of his proposals to management.

A former partner at William Ackman's Pershing Square Capital Management, McGuire is now running Marcato Capital Management, one of the country's hottest hedge funds. The Harvard MBA graduate is relying on his expertise in analyzing balance sheets in making his approach for Sotheby's, which attracts collectors from all over the world.

Selling Sotheby's glass-front world headquarters on Manhattan's upper East Side is just one possibility, and the company's small lending business might rely more on debt than cash, according to people familiar with McGuire's ideas but not authorized to speak publicly.

On Wednesday, Sotheby's signaled it understands the hedge fund's concerns, saying it will review financial strategies, leaving the door open to raising its dividend and taking on debt.

"Each of these options presents possible advantages and disadvantages; all are complex," Sotheby's chairman and chief executive Bill Ruprecht said in a statement. "We are determined to fully exploring every avenue and we are committed to pursuing return of capital alternatives," he said without mentioning Marcato Capital Management or any other shareholder by name.

When McGuire's Marcato Capital Management started the process of buying Sotheby's shares this summer, it marked the 37-year-old manager's fifth activist campaign in less than three years of running his firm.

McGuire notified regulators and the company of his plans with a 13-D filing in June. He was soon joined by others.

Three weeks later, Daniel Loeb's Third Point put out a filing and now owns 5.7 percent. Nelson Peltz' Trian owns about 3 percent and analysts say he has ideas on improvements.

Representatives for the firms did not return calls.

While managers cannot work together, they can compare notes. And people familiar with Marcato Capital Management's proposals say they are likely to be complimentary to Loeb's ideas, which may focus more on operational improvements.

ONE-OF-A-KIND BUSINESS

Many activist investors make their demands for change publicly. Loeb created a Website during his battle with Yahoo and releases his missives to management in filings.

So far, McGuire has stayed out of the limelight by speaking at only a handful of conferences while declining most interviews.

And up until now, even Loeb, who has an impressive art collection, has been calm in this fight, saying only that he planned to "engage in a dialogue" with Sotheby's.

At Marcato Capital Management in San Francisco, McGuire does most of the work himself, including calling up chief executives at target companies and creating the 100-slide power-point presentations made famous by his former boss Bill Ackman.

Bets on real estate and agribusiness company Alexander & Baldwin , and DineEquity , which operates fast food restaurants IHOP and Applebee's, have been winners.

This year, Marcato Capital Management is up 17.1 percent, keeping pace with the Standard & Poor's 500 Index and handily beating the average hedge fund's 7 percent rise, said a person familiar with the returns. Last year, it rose 29 percent while the average hedge fund gained 7 percent.

In Sotheby's, McGuire and others found a one-of-a-kind business that has been largely ignored by Wall Street analysts and is still smarting from the effects of a price-fixing scheme with rival Christie's two decades ago. Sotheby's paid a $45 million fine in the criminal case and its former chairman, Alfred Taubman, went to prison.

Even as Sotheby's made blockbuster sales such as last year's $120 million auction of Edvard Munch's "The Scream," several shareholders worried about a lack of urgency at the top levels.

Profits have not been appropriately redeployed and capital has not been used in the most intelligent way, some shareholders have mused, pointing to the company's small lending business that fronts clients' money if their paintings have not sold but they would like to purchase another one.

In signaling that Sotheby's is ready to make some new choices, CEO Ruprecht said the company "is committed to healthy two-way communication with our shareholders." But the hedge funds are likely to keep up the pressure, for a while at least.

(Reporting by Svea Herbst-Bayliss; Editing by Richard Valdmanis and Gunna Dickson)

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