The fine art of making money

Christie's has already mined the commercial potential of paintings, so what's the attraction for its new shareholder? Robin Duthy reports

THE ART WORLD was shaken last week by the announcement that Francois Pinault, who controls the pounds 11bn Pinault-Printemps-Redoute empire, had acquired a 29 per cent stake in Christie's for around pounds 140m, valuing the group at some pounds 480m. The off-market deal, at an undisclosed price came as a surprise to Christie's. It was bought from Joe Lewis, the Bahamas- based investor who was in the consortium of wealthy individuals who failed in their attempt to buy Christie's and take it private last December.

The art business is glamorous, fast-growing and full of opportunities - or so people seem to believe. But Christie's, as well as its arch-rival Sotheby's, has long mined the commercial potential in art and antiques. So where, with Mr Pinault, can Christie's go from here?

The international art auction house has not been dawdling since the company went public in 1973. Sales reached pounds 1.2bn in 1997 when they overtook those of Sotheby's. The firm has 80 categories of auctions, ranging from great paintings and sculpture to teddy bears. It has 15 salerooms and more than 100 offices world-wide, including those in China, Indonesia, and Argentina.

In the past Christie's has tried to develop new markets. As early as 1979 it attempted sales in Tokyo but pulled out, or rather was frozen out by the local dealing fraternity. Its forays into specialist sales of Scandinavian and Belgian painting also failed. On the other hand, recent ventures into German and Austrian painting, Irish painting and an Indian sale, have been a success. So too have theme sales on exploration, natural history and other subjects.

But its profits, which topped pounds 40m last year, depend crucially on landing the big fish. Every major collection is the subject of a fierce battle with Sotheby's. Until two years ago important vendors could beat the salerooms down to zero commission (leaving them with only the 10 per cent buyer's premium as income) under threat of consigning their goods to the opposition. Now a sliding non-negotiable commission scale has been introduced by both.

Sid Bass, the Texan billionaire who, with his brother, owns 5 per cent of Sotheby's, is known to regard the art world as an underdeveloped sector of the entertainment business. But how would he and Francois Pinault leverage their investment?

By clever marketing, the salerooms have already widened their customer base to thousands of collectors who, 20 years ago, would not have ventured into what was essentially a wholesale market dominated by dealers. But taking the salerooms down market is a non-starter; the cost of handling low-value lots precludes it. And nobody can see how to market the Christie's or Sotheby's name more aggressively without affecting the cachet and exclusiveness which their customers find so appealing.

Both salerooms are revamping their websites to the point where you may soon be able to browse through their catalogues, but they will need to move fast. The Auction Channel will be broadcasting live auctions by cable and satellite later this year and pre-registered viewers will be able to bid using the star key on their telephones. Another company, Auctions On-Line, has a website where you can browse through 4,000 catalogues and leave commission bids.

Buying art over the internet without seeing it in the flesh may sound like financial suicide. Yet just as many motorists would buy a car blind as long as the RAC had done a comprehensive test, so art buyers can rely on letters of authenticity (as the salerooms already do) from leading experts, supported by the knowledge that the painting in question is still listed in the increasingly numerous definitive listings (catalogues raisonnes) of major artists.

Mr Pinault, no doubt, has a strong commercial rationale for acquiring his slice of Christie's. But it could well be he bought the stake for fun. What's the point of being a billionaire if you cannot enjoy yourself? He is already a major buyer of modern painting and he likes wine and skiing. Unlike the rest of us, he can take his pleasures that bit further. He now owns Vail, the Colorado ski resort, and in 1993 bought one of France's greatest vineyards, Chateau Latour, for pounds 71m (his holding in Samsonite luggage is more puzzling, and he would surely trade up to Louis Vuitton if the shares were not so tightly held).

So, the 29 per cent stake in Christie's could be another fun investment. The super-rich from the Medicis onwards always looked to fine art. Not only would the Christie's stake keep Mr Pinault in closer touch with great art but it would be the key to a glamorous international set.

But there is a French national dimension too. The archaic French auction system of state-licensed commissaire-priseurs has managed to exclude Christie's and Sotheby's from holding sales on French territory for 200 years. Under this system the French share of the global market declined to a piffling 8 per cent. After years of wrangling with Brussels the French government will soon have to pass legislation allowing non-French companies to hold sales on French soil.

Both Christie's and Sotheby's have large, prestigious offices in Paris awaiting the green light. But when that finally comes it will be a substantially French-owned gavel that Christie's bring down for the first time and there must be pleasure for a Frenchman in that.

The salerooms can work to increase their volume of sales but there's not a lot they can do about values. The movement in art prices since 1975 has been erratic, but Mr Pinault's timing looks good. The Art 100 Index, produced by Art Market Research, tracks prices of European and North American paintings from Old Masters through to contemporary painting. This now shows a gain of 620 per cent since 1975, equivalent to compound growth of just under 9 per cent. But investors have recently had a bumpy ride. Prices shot up by 240 per cent in the four years to 1990, fuelled mainly by Japanese buying of Impressionist and modern European paintings. The source of cash for this speculation was the booming Japanese property and stock markets, but these collapsed in late 1990. The start of the Gulf War in 1991 frightened off European and American collectors in droves and prices dropped by over 50 per cent in two years.

Since then the market has been nursing itself back to health. A recovery in 1993 fizzled out, but the gradual climb of the past two years seems to be soundly based. Performances vary from one sector to another: French Impressionists, for instance, are now up 1340 per cent on 1975; English 18th Century furniture is up 1740 per cent, but Chinese ceramics are up just 700 per cent.

Even dealers who made a fortune in the 1988-1990 boom see that peak as an unwelcome aberration. Confidence in what had been a steadily rising market was damaged and nobody knows what would persuade the Japanese to resume buying even if their national economic problems were solved. Even so, considering the trillions of dollars of gains made by American and British investors during three years of soaring stock markets the recovery is very low-key.

One dampener on the market has been the fear that some 3,000 second and third-grade paintings by Chagall, Utrillo, Buffet and the like, now held as collateral by Japanese banks, could flood the market if and when those banks accept that their security is now worth a fraction of the loans they made. As it is, Western dealers have been swarming around Japanese banks trying to pick up bargains.

Whereas a couple of years ago East Asia was identified by the salerooms as the region with the greatest growth potential, now, even if an economic meltdown triggered by Indonesia or Japan can be averted, development hopes have been switched to Latin America.

What these mega-investors may have noticed is art increasingly interacting with other worlds. Feature films on Andy Warhol, Picasso, Robert Mapplethorpe, Francis Bacon and others, have been released or in production. There is an unprecedented cross-fertilisation between art and fashion and design. Successful contemporary art fairs have encouraged the launch of many others around the world.

In the UK, more people now go to museums and galleries than football matches. The ever-popular Antiques Road Show has been joined by an assortment of art and antiques programmes. BBC/Flextech's new cable channels, Arena and Style, draw heavily on the art world. BBC2 has an arts magazine series now in development, and, in Jan-uary, CNN International launched its weekly 30-minute arts magazine programme, The Art Club. BBC World is considering a similar international show with features on celebrity collectors, blockbuster exhibitions, art world scams, art prizes and fairs, analysis of art as investment, plus stories on thefts and forgeries. The Antiques Show, the revived Going for a Song and Channel 5's Brunch, are further examples.

In the financial world, Citibank is restructuring its Art Advisory Service and may make it available to private banking customers. Coutts International recently launched an Art Management Programme for its private banking customers. Five financial groups are now known to be considering art investment funds.

Financial institutions are sponsoring art events and prizes. Corporate art collecting may be shrinking in the US, where boardroom philosophy dictates that announcements of massive redundancies should not be made from offices adorned by $50m art collections. But, in the UK, corporate buying is probably growing.

Mr Pinault may not have worked out just how art is going to help him toward his second billion - but it may be about to do just that.