A SHARE OF THE ART MARKET IS NOT FOR EVERYBODY EVEN THE VERY RICH

Even for Simon de Pury and Bernard Arnault

In 1999 the French businessman Bernard Arnault and his LVHM group (1) -which employs 70,000 people and made sales of 16 billion Euros in 2007- acquired Phillips auction house created in 1796 in London for a reported $121 million. A year later, Arnault brought in the former Sotheby’s executives Simon de Pury (picture) and Daniella Luxembourg to run the company, which he merged with their Zurich gallery, de Pury & Luxembourg. The resulting firm, Phillips de Pury & Luxembourg, was cast by the media always keen to predict the future as a threat to the duopoly of Christie’s and Sotheby’s, forgetting in the process that the duopoly was in fact already threatened by Poly International of China and China Guardian.

But even LVMH's power and profitability (2.3 billion Euros) and huge investments in the business failed to win Phillips a significant share of the Impressionist, modern and contemporary art markets : LVHM’s ambitious strategy foundered in a sea of red ink. The deadly decision to offer consignors high guarantees led to its gaining consignment of the very famous Heinz Berggruen and of the Marion and Nathan Smooke collections. On the Smooke collection guaranteed at $180 million, the group lost between $ 40 and 50 million. In the end, Phillips accumulated losses of almost 400 million.

Arnault and company gradually bowed out of the partnership, ceding control to de Pury & Luxembourg in February 2002 for $ 30 million ; the following January, LVHM sold its remaining stake (27.5%) for a token sum. In March 2004 Mrs. Luxembourg resigned to start her own dealership and art-investment fund, selling her shares to de Pury, with whom she still maintains the Zurich gallery.

In spite of all his efforts Simon himself has been little by little sinking in a sea of red ink and has eventually decided to throw the towel. Competing against ancient giants like Sotheby's (1744 )and Christie's (1766 ) even in a booming market like the one of the last decade was too much for the small Phillips de Pury auction house and its meager $464 million annual turnover for the Fine Art public market (2.8%). Christie's achieved global sales of $6.3 billion (38% of which 197 million for the contemporary art market) and Sotheby's of $5.9 billion in 2007 but still represents 36% on the fine art public market.

So in early October 2008, the Moscow-based Mercury Group, Russia’s largest luxury-retail company managed by CEO Leonid Friedland, bought a controlling stake in the cash-strapped auctioneer Phillips de Pury & Company. Although the sums involved in the private transaction were not released, it is believed that Mercury paid approximately $60 million for its majority share, of which “around 50 percent” was to cover Phillips’s debt. In other words Friedland paid the same price that Arnault paid almost 10 years ago and is committed to use 50% of the cash to service the debt of the group Phillips de Pury.

Frankly in a market that is going down the drain, with the competition getting everyday tougher and with the credit making itself rare one does not see why the Russians would do better than the French. And by the way this story shows once more than getting a share of the art market is an expensive venture and not in the means of even a very rich man. Good luck Leonid !!!

(1) Dior, Champagne Moet & Chandon, Tag Heuer, Vuitton, Les Echos, Investir, DFS Galleria