Amazon Buys Sotheby's Stake
In an effort to broaden its offerings to include high-ticket items with a guarantee of authenticity, online retailer Amazon.com is buying a $45 million stake in Sotheby's.
The Seattle-based firm said Wednesday it purchased 1 million shares of the London auction house Sotheby's Holdings at $35.44 and three-year warrants to buy an additional 1 million shares at $100.
As part of the deal, the companies - both with roots as booksellers - are forming a 10-year alliance. The companies will launch a joint site to auction the "finest authenticated products in art, antiques, collectibles, and other premium categories" and provide a "global network of certified sellers," as noted on Amazon's Web site.
The move comes at a time when both companies are seeking alter egos.
Amazon's (AMZN) move to build its auction presence comes at a time when it's under pressure to prove that it can maintain its lead as the dominant e-retailer. In April, Amazon shocked the investment community when it said it had to aggressively spend to develop new services such as Web auctions.
Those unknown costs sent shares reeling from an all-time high of 221. In recent trading, shares of Amazon rose 7 to 104 9/16. Sotheby's (BID) jumped 3 9/16, or 10 percent, to 38 11/16.
Earlier this year, Sotheby's unveiled a plan to spend $25 million to launch an Internet business in the second half of 1999.
"It's a very logical marriage," said George Sutton, an analyst at Dain Rauscher Wessels.
"Sotheby's dealer network provides supply, while Amazon will be focused on demand," he said, referring to exclusive agreements Sotheby's formed with more than 2,000 dealers as part of its Internet strategy.
Sotheby's has raised $45 million "to help accelerate that agenda," Sutton said. "It makes a lot of sense," he said.
Auction sites have gained popularity among customers and online retailers alike. Amazon's move into the higher-margin auction business in March received praise from Wall Street since auctions carry gross margins of 80 percent, which will help Amazon reach a low-to-mid teens operating margin by 2003.
By some estimates, Amazon's auction business could add $20 million in sales this year and $65 million by next year, roughly 3 percent of what Amazon is expected to generate in 2000.
Sotheby's will continue to operate its own site.
The deal comes six weeks after online auctioneer veteran EBay (EBAY) bought San Francisco auction house Butterfield & Butterfield.
Butterfield & Butterfield brought to EBay some 19th century cachet and more than a century's worth of authenticated, premium products. Sotheby's, whose origins date back to 1744 as a book auction house, is meant to bring the same clout to Amazon.
One analyst said the union will outshine the Butterfield & Butterfield/EBay partnership.
It's "far superior" to the EBay and Butterfield & Butterfield partnership, Meyer said. "Butterfield Butterfield is a regional operator with lesser quality merchandise. It doesn't have the name recognition" that Sotheby's does, he said.
"The EBay approach says 'we're an agent' whereas Sotheby's will stand behind anything it sells," Meyer said. "That differentiates them from any other auction site."
Shares of EBay still shot up 9 5/8, or 7 percent, to 145 amid a broader market recovery. Josephthal & Co. Nicole Schmidt started coverage on the online auctioneer with a "buy" rating and a $200 price target.
In an introduction to the new offering on Amazon's auction site, where it states: "You'll be one of the first to know when we open," Amazon is already wooing buyers and sellers.
The partnership allows Amazon to "guarantee the authenticity and condition of the items," wooing sellers with the mass-market appeal of showcasing products to its 10 million customers. For buyers, Sotheby's history of "authenticating premium products for over 255 years," should pacify concerns of fraud.
"Sotheby's strengths are art, prestige and panache, but they have technology-related deficiencies," said James Meyer, an analyst at Janney Montgomery Scott. Amazon has technical expertise and wide distribution channels, he said.
The two partners have the potential to draw a huge number of new customers, Meyer said.
"The go-to place on the Internet is the place with the most buyers and sellers," he said.
Bambi Francisco is the Internet editor for CBS MarketWatch. Stephanie O'Brien is a reporter for CBS MarketWatch.
Written By Bambi Francisco and Stephanie O'Brien, CBS MarketWatch