Sotheby's sets dividend, share buybacks, investors shrug

By Siddharth Cavale and Svea Herbst-Bayliss

BOSTON, Jan 29 (Reuters) - Sotheby's said on Wednesday it will return $450 million to investors through a special dividend and a share buyback, but the moves got a lukewarm reception from investors including two activist hedge fund managers who have been pressuring the venerable auction house to make changes.

The announcement comes four months after 270-year old Sotheby's pledged in September to review how it spends its money after Richard McGuire's Marcato Capital Management and Daniel Loeb's Third Point took big stakes over the summer.

Marcato Capital Management said the steps do not go far enough. Loeb declined to comment.

Sotheby's shares jumped in pre-market trading on the investor friendly moves, then slid, ending 0.27 percent lower at $48.75.

Loeb, whose fund is the biggest investor in Sotheby's with a 9.3 percent stake, has been pressuring the company since early October to remove its chief executive officer and become more competitive with rival Christie's. In a letter to CEO William Ruprecht, Loeb called the auction house "an old master painting in desperate need of restoration."

New York (Frankfurt: HX6.F - news) -based Sotheby's said it would pay shareholders a $300 million special dividend in March and buy back stock worth $150 million under a new share repurchase program.

Sotheby's will also separate its capital structures and financial policies for the company's two main businesses: Agency, which involves auction and private sales, and Financial Services.

"The message we are delivering is clear. We are returning meaningful capital to our shareholders now and in the future and establishing a framework that puts Sotheby's in the strongest position to compete and win in this marketplace," CEO Ruprecht said in a statement.

The auction house is also considering options for its real estate holdings in New York and London, something McGuire's Marcato Capital Management had been pressing for.

Marcato, which owns 6.6 percent of Sotheby's and has been quietly pushing the company to make balance sheet changes for six months, thinks Sotheby's should return at least twice as much to shareholders.

"Sotheby's can and should return a total of $1 billion of capital to shareholders within 12 months," the hedge fund said, adding that Sotheby's can afford this sum and still maintain more than enough liquidity to meet long-term strategic objectives.

Even after Ruprecht said in the fall that the company would review its business, the pressure from the hedge funds did not let up.

In October, Loeb, known for writing sharply worded letters to chief executives, called for the departure of Ruprecht, who rose through the ranks at Sotheby's since joining in 1980 as an administrator in the rug department.

Instead in late November Tobias Meyer, Sotheby's principal auctioneer, left the company, sending shock waves through the art world.

While Loeb has focused more on management and the company's competitive position, McGuire has asked for other things including that the company sell off its glass-front world headquarters on the Upper East Side in New York and change how it finances art purchases, relying more on debt than cash.

Loeb's and McGuire's funds rank among the industry's best performers last year, each chalking up gains of more than 20 percent while the average hedge fund gained 9 percent.