Outlook: Making a lottery out of an auction

Christie's International, the art auctioneer, yesterday unveiled what on the face of it looked like a splendid set of results. Sales and profits were both up a fifth, and despite the disappearance from the showrooms of Asian buyers, Christies talked in glowing terms about the best art sales market in years. Which is just as well, since the company has just turned down an offer said to be in the region of 280p a share from a consortium of billionaires organised by SBC Warburg Dillon Read. The onus is now on Christopher Davidge, chief executive, to demonstrate that his company is worth more.

But hold on a minute. What's this? The profit before tax is struck before an exceptional item of pounds 5.3m. Factoring this cost in, profits last year would barely have risen at all. So what is this "exceptional cost"? Not saying, says Christies, other than to explain that it is apparently common practice in the art world to make loans to clients secured against consignments for sale. In this case a loan was made against the security of an "unusual but important collection". However, prices in this section of the market have since fallen and Christies now thinks it prudent to make a provision.

According to the company's statement, the loan was made "some years ago", which rather begs the question of why it has taken so long to provide against it. Presumably it might have something to do with Warburg's due diligence. But the rather bigger question is whether such losses should be treated as exceptional at all. These days auction houses are often forced to back their valuations by bidding against each other for big collections before the real auction begins.

It is not clear that shareholders in these companies fully appreciate the degree of financial risk that this involves. Shareholders may have thought they were investing in a commission based, people business. Infact the nature of auctioneering may have changed to the degree that these are now more sophisticated finance companies than anything else.

Get the valuation right, and you make hay; get it wrong and you lose your shirt. It is an open secret, for instance, that though the Ganz collection had record takings, Christies actually made very little money out it. This was because the financial underwriting was done by someone else (again, Christies is not saying who).

Judging by the exceptional item, in many other cases Christies is taking the risk onto its own books. It may be that Christies is clever and well capitalised enough to manage this risk, but don't bet on it. Whatever the case, shareholders ought to be aware that they are investing in more of a bank than an auction house.