Limited investment resources and a rocky path to restructuring are forcing major changes at Art Basel’s parent company, the MCH Group. Long focused on both producing its own trade fairs and providing services for others’ live events, the Swiss firm has announced that financial realities now require it to choose only a single core business going forward. That business will be its own fairs—and to reinvest in this segment, the MCH Group will explore everything from cost-cutting to a full or partial sale of its robust Live Marketing Solutions division.
The company made its decision public late last month, shortly before releasing its financial results for the first half of 2019. Although the board saw opportunities for growth in each of its two core competencies, its members concluded that the MCH Group was better positioned for sustainable success with its trade fairs than its experiential marketing efforts. At the same time, they also recognized that a brighter future won’t come cheap or easy, necessitating a strategic reckoning.
“New ideas will be required,” said MCH Group CEO Bernd Stadlwieser in a statement. “We must therefore invest in innovations, digitization, and internationalization.” The aim will be to “build communities that go beyond the physical event.”
Art Basel Hong Kong. Courtesy Art Basel.
The Path Forward
The need for reinvestment may make a sacrificial lamb of the company’s Live Marketing Solutions division, whose services include everything from consulting with clients on live-event strategy to building stands and other display elements inside convention centers. The department currently employs roughly 500 people worldwide and accounted for just under 40 percent of MCH Group’s sales through the first six months of 2019. (The Exhibitions division generated about 56 percent.)
Reached by artnet News, MCH Group spokesperson Christian Jecker stated that the company has not published any projections concerning a possible sale price for the experiential marketing wing. However, an article for BZ, a Swiss daily newspaper, estimated that merely offloading MC2, originally an American live-event marketing firm acquired by MCH Group in 2017, could generate upwards of CHF 100 million (roughly $100 million) to reinvest in its fairs.
Another crucial component of MCH Group’s future will be the fate of its various physical venues. While art-industry veterans are most familiar with Messe Basel, the sprawling complex Art Basel occupies in the heart of its namesake city, the MCH Group’s real-estate holdings are substantially larger. The company controls over 182,000 square meters (nearly two million square feet) of exhibition halls, theaters, and conference rooms in Basel and Zürich combined.
The MCH Group has stated that it will reassess the ownership and operational structure of these venues “over the medium term.” Jecker would not elaborate on the timeline other than to say that this element “is not the top priority at the moment” and “has no direct influence on the core-business strategy that has now been defined.”
But the company has made clear that all options will be on the table when the time comes, including selling to a private owner or soliciting greater public investment. It is also seeking to entice more guest fairs to its venues, with the goal of increasing its current 25 percent occupancy to more than 35 percent.
The atmosphere at Art Basel Miami Beach 2019. (Photo by Mike Coppola/Getty Images)
‘Showdown’ Over Art Basel?
The board’s plan has one vocal opponent inside its shareholder ranks. Erhard Lee, whose Zürich-based AMG fund holds a 10 percent stake in the MCH Group, has blasted the new strategy as “stupid” in the Swiss press. He argues that the company would do better by selling the trade-fair business and doubling down on its Live Marketing Solutions arm. He has also advocated for a full or partial sale of Art Basel via the assumption that, just like a sought-after painting in a speculative market, the brand could attract a price far above its on-paper value.
When asked if selling Art Basel was a serious consideration within the MCH Group, Jecker responded, “No, not at all.”
Lee took to the Swiss media in late September to call for a special audit of the board of directors, suggesting that they have acted against shareholder interests. He also threatened to call an Extraordinary General Assembly to force a “showdown” over the company’s future. However, Jecker said that the company still had not received “any according request” from Lee or AMG regarding these matters as of mid-afternoon Friday, roughly two weeks after his comments appeared in BZ.
Proposing the sale of Art Basel seems especially curious given that the MCH Group identifies the fair as a model for the type of expansion it hopes to implement with its other events, particularly its Baselworld trade fair for watches. “We already have a strong community for Art Basel and we wish to extend this with additional offerings,” said Stadlwieser. “For Baselworld, we are intending to establish an extended industry community and are thus considering further events abroad, which is a matter of concern for many customers.”
Art Basel 2018. Image © Art Basel.
Follow the Money
Art Basel also emerges (albeit briefly) as an unmitigated bright spot in the MCH Group’s results for the first half of 2019. Although the report breaks out no specific figures for the fair, it states that the brand “further strengthened its leading market position and economic stability in this year’s editions of its Hong Kong and Swiss fairs.” Few of the MCH Group’s other endeavors seemed to inspire much praise.
Overall, the results show continued turbulence. Consolidated operating income (effectively, sales) declined nearly 24 percent versus the equivalent period in 2018, while operating expenses dropped by only about 17 percent. That combination left the MCH Group one million Swiss francs in the red during 2019’s opening half. Last year, the company netted CHF 21.5 million in profit over the same span.
The group attributed the steep drop to a variety of factors. Most notably, an exodus from Baselworld continues to wreak havoc on both of its core businesses. The fair saw half its exhibitors vacate last year, including Swatch, its largest client. MCH Group’s then-CEO René Kamm resigned shortly after Swatch announced its departure. In the results for the first half of 2019, MCH Group noted that “declines in Baselworld” depressed sales in its fair business, creating “follow-on effects” felt in reduced demand for its exhibition-dependent service businesses, such as marketing and stand construction.
Other dips in operating revenue proceeded from the restructuring plan initiated in the summer of 2018. The company sold Winkler Livecom AG, a subsidiary of its Live Marketing Solutions division, late last year. In May 2019, it also furthered its planned retreat from regional art fairs when it divested its ownership stake in Art Düsseldorf. And while cost savings may have resulted, sales likely took a temporary hit from MCH Group’s decision to trim its Swiss-based workforce by 50 employees, to a new total of roughly 520.
At least one new initiative seems to have failed to deliver the growth the company anticipated, as well. Underwhelming performance by the inaugural Grand Basel, billed by Architectural Digest as “the Art Basel of collectible cars,” convinced the MCH Group to state in the results that it would “not make any further investments in [the event] for the moment”—a signal that the fair gave little lift to the company’s health.
Despite the report’s overtures toward “initial positive effects of the restructuring efforts,” results are poised to get worse before they get better. True, the organization notes that cost savings and a slimmed-down trade-fair portfolio, pruned further by the early September 2019 sale of its shares in the India Art Fair, will result in lower expenses. But second-half results “will be weaker than the first half,” and the company expects to take a loss for the full year “of the same order of magnitude” as it did in 2018.
One silver lining: the results state that the MCH Group should have no need to write down the value of its exhibition halls again, meaning it may finally be on the verge of a turnaround. Still, that turnaround will not come soon enough for one of its public investors.
Visitors explore Mary Boone’s booth at Art Basel Miami Beach. (Photo by Joe Raedle/Getty Images)
Getting Out While the Getting’s Good?
Swiss cantons—essentially Switzerland’s equivalent to states or provinces—collectively own 49 percent of the MCH Group. But the canton of Basel-Landschaft is now on the verge of selling its 7.8 percent stake in the company.
Basel-Landschaft purchased its shares all the way back in 1918, when an economic crisis compelled officials to deem the MCH Group’s health vital to the public good. This judgment meant the 7.8 percent stake was labeled as a so-called administrative asset in the canton’s books, alongside the likes of public-school buildings. But after 101 years, officials reclassified the shares as a financial asset this June, freeing them to sell the canton’s stake when the opportunity arises.
When asked by artnet News, Jecker of the MCH Group said the impending sale “has no direct impact on the core-business strategy that has now been defined.” According to BZ, the canton of Basel-Stadt, the MCH Group’s largest shareholder at 33 percent, has the right of first refusal on Basel-Landschaft’s stake. Although the latter’s shares have a nominal value of CHF 4.7 million, government economists estimated them to be worth about CHF 11 million in mid-September.
Basel-Landschaft officials have justified the decision on purely bureaucratic grounds. They reason that current economic conditions relieve the canton and its citizens of the duty to continue supporting the MCH Group.
However, a look at the company’s debts raises a more financially motivated possibility. The MCH Group has received three government loans totaling CHF 85 million in the past 10 years. The first of those loans, for CHF 30 million, comes due in 10 interest-free tranches of CHF 3 million each starting in June 2020—but only if the MCH Group has an equity ratio of at least 30 percent. (An equity ratio quantifies the percentage of a company’s assets financed by shareholder equity; the lower the percentage, the higher the amount of debt on its books.)
The company’s financial struggles place it light years away from that milestone. Despite improving on the 11.4 percent equity ratio registered at the end of 2018, it reached an equity ratio of just 12.3 percent in its results for the first half of 2019. This figure makes it highly unlikely that Basel-Landschaft will see repayment anytime soon. If officials believe they can generate roughly CHF 11 million in the immediate future by selling the canton’s stake in the MCH Group, that prospect may have more appeal than holding onto the shares for the possibility that the government will be made whole at some indeterminate point in the future.
The operative question for Basel-Landschaft, then, is the same as the one facing all MCH Group shareholders, public and private alike: How many more quarters of losses are worth enduring to see if the restructuring and renewed focus on traditional fairs pay off? No matter the answer, the one thing we can count on is that more change is coming. To succeed, the company will need its other fairs to have better luck replicating the Art Basel model than most of Art Basel’s competitors.