This week, the deadline for EU antitrust regulators to approve Richemont’s spin-off of Yoox Net-a-Porter in a joint venture with rival Farfetch came and went without news. But a decision has been made and an announcement is set for Monday, according to sources, with the e-commerce mega-deal widely expected to get a green light.
Under the terms of the agreement, Farfetch is set to acquire 47.5 percent stake in YNAP with provisions for a full acquisition within three to five years. Emirati business mogul Mohamed Alabbar will acquire a 3.2 percent stake, helping to bring Richemont’s stake below 50 percent so it can deconsolidate the unit in its financial reporting.
But in the 14 months since the deal was first announced, Farfetch has lost investor confidence, sending its share price plunging almost 90 percent. This has significant implications for the deal, Richemont, Yoox Net-a-Porter and the fashion ecosystem at large, given that hundreds of boutiques, major department stores like Harrods and Neiman Marcus, and brands from Thom Browne to Chanel depend on the company’s technology. (Richemont declined to comment for this story. Farfetch did not respond to a request for comment.)
What went wrong with Farfetch? What do its woes mean for Richemont, YNAP and the industry at large? And where do things go from here? BoF breaks down the situation.
What went wrong with Farfetch?
Despite a post-pandemic boom in luxury spending, Farfetch has performed poorly in recent quarters, sending investor confidence and the company’s share price tanking. In August, Farfetch reported second-quarter revenues contracted 1 percent year-on-year to $572 million, well below analyst forecasts of $650 million. The poor results prompted the company to lower its sales outlook for the full year by $500 million.
On the liquidity side, Farfetch appears to be thinly stretched. After 15 years in business, the company still is yet to turn a profit. In 2022, net losses widened to $817 million, according to Bernstein analysis, and the e-tailer also has over $1 billion worth of debt in term loans and convertible notes. Analysts at credit rating and research firm Moody’s Investor Service awarded Farfetch a B3 credit rating, well below investment grade.
In its current financial state, analysts say Farfetch would be unable to fully acquire YNAP, which its deal with Richemont clears the way for the company to do in a few years. Plus, as part of the deal, in five years Farfetch is due to pay Richemont an additional $250 million for its initial YNAP stake, which would also coincide with some debt repayments coming due.
“It’s a really material potential cash outflow that Farfetch has to cover,” said Citibank analyst Monique Pollard.
Part of the issue is that all three of Farfetch’s key business pillars are flailing: its marketplace is struggling to grow and still relies on discounts and promotions to generate traffic; its platform solutions business, which provides white-label tech and logistics products for brands and retailers, lacks momentum. And the brands it operates, including Off-White and Palm Angels, which sit within its New Guards Group “brand platform” division, are fast losing market share amid mounting consumer fatigue of luxury streetwear. Revenues for the unit plummeted more than 40 percent in the latest quarter from a year earlier.
“The problem with that part of the business underperforming is… that’s the only part of the business that is profitable,” said Pollard.
There’s also a broader concern that Farfetch, which promised to revolutionise the future of luxury retail when it started up in 2008, has become a company that’s too big, too bureaucratic and, most importantly, lacks focus. Critics say the company’s diversification strategy over the years has been erratic, particularly its expansion into owning brands with the purchase of New Guards Group in 2019. Experts are questioning whether the company’s current scope is too vast to sustain, particularly amid mounting pressures.
The company has shifted into cost-cutting mode of late, laying off about 800 employees (just over 11 percent of its headcount) earlier this year, and shuttering its less-than-two-year-old beauty division, despite heavy investments in the venture. (Beauty retailer Violet Grey, which Farfetch acquired in January 2022 for over $50 million, is now reportedly up for sale.)
But whether that’s enough to turn Farfetch’s fortunes around remains to be seen. The dramatic decline in the company’s share price indicates investor patience is wearing thin.
What does this mean for Richemont and YNAP?
Put simply, Richemont is getting a raw deal: the collapse of the Farfetch share price over the past year means that the original agreement announced last August now makes far less sense for the Swiss group, according to experts.
Instead of cash, Richemont is set to receive an approximately 11 percent stake in Farfetch in exchange for a 47.5 percent stake in YNAP. When the deal was announced, that stake was worth $440 million. Now, it’s worth less than $100 million. The decline in Farfetch’s market value will also mean Richemont taking a larger write-down on YNAP.
Ultimately, some fear that Richemont is effectively just swapping shares in one problem company (YNAP) for shares in another (Farfetch). Plus, as part of the deal, Richemont has agreed to replatform all its maisons — including jewellery titan Cartier, which is estimated to generate more than €10 billion in annual sales — using Farfetch’s technology and distribute them via the Farfetch marketplace. In essence: Richemont is relying on Farfetch to execute its digital strategy, a move that will entwine the companies closely going forward.
“Pushing YNAP out of the door could be fraught with getting bigger problems coming in from the window,” Bernstein analyst Solca said, adding that the share price of Richemont seems penalised by the heightened uncertainty surrounding the deal, among other things. “The best way for Richemont to deal with its YNAP problem is to close it down. The deal is an unnecessary complication, and could potentially cost more to Richemont.”
YNAP’s future is currently up in the air: if Farfetch’s financial position doesn’t improve over the next few years, the company won’t be able to acquire the rest of e-tail giant from Richemont. But a full acquisition is anyway contingent on loss making YNAP achieving profitability within three to five years. If YNAP — which has made consistent losses of more than €200 million a year — can’t turn a profit, it will either be sold to a third party, put up for IPO or shut down.
Where does this leave the wider ecosystem?
How the situation unfolds could have significant implications for the broader luxury ecosystem at a difficult time for the sector, as hundreds of boutiques, some of the world’s biggest department stores and many small-to-medium sized brands rely on Farfetch’s technology.
Farfetch is under pressure to narrow its focus and concentrate on reviving growth in its core marketplace business, but scaling back its white label e-commerce services could spell trouble for partners with ripple effects across the industry.
About $3.5 billion worth of luxury goods were sold on Farfetch’s marketplace last year, making it one of the largest digital distributors in the sector. In a worse-case scenario, were Farfetch to collapse, the consequences for the industry would be dire.
“The most important negative impact would be for the independent mam and pap multi-brand boutiques, who are using Farfetch as a vehicle to beef up margins in the grey market,” said Solca.
Such a scenario would also further damage investor confidence in the wider online luxury space, which has struggled in recent years. MatchesFashion has grappled with widening losses, while Ssense laid off about 7 percent of its headcount earlier this year. Mytheresa remains one of the few players that has consistently made a profit, but growth is slowing and its share price has dropped almost 70 percent year to date.
What happens next?
Analysts say the deal seems set to go ahead, subject to EU antitrust regulatory approval and any break clause negotiated between Richemont and Farfetch. But given the collapse in Farfetch’s share price, Richemont could try to renegotiate the terms of the agreement.
Completion of the deal “could make a big difference” to Farfetch given its liquidity issues, said Bernstein’s Solca. YNAP is expected to be debt free and have at least $290 million on its balance sheet; in addition, per the terms of the transaction, Richemont is committing a $450 million credit facility, available for 10 years, which Farfetch can draw down on for investments in YNAP.
Plus, Farfetch is winning key Richemont brands as clients. Big names like Cartier may help attract other high profile brands to its white label services in the future, while being able to add these brands — and their high-ticket products — to its marketplace will be a financial boon.
“They will see a benefit from having so much more GMV on the platform,” said Citi’s Pollard. “They hope that a lot of that benefit can help the digital platform get to profitability.”
Yet the future success of the deal also rides on Farfetch being able to turnaround its fortunes — and fast. If Farfetch’s position deteriorates further, it could become a takeover target, with Richemont first in line to step in, given everything at stake for the group.
This seems unlikely right now, given how hard Richemont has worked to get YNAP off its balance sheet. However, if the deal goes forward as planned, Richemont will be closely tied to Farfetch and needs the company to succeed.
Plus, Richemont has plenty of cash. The Swiss group ended the financial year in March with a net cash position of €6.5 billion. And at its current market capitalisation, Farfetch is a steal, worth a little over $600 million, down from a high of over $25 billion in 2021. Alibaba could also be a takeover contender, given its already partnered with Farfetch on a joint venture in China.
Although, as Solca pointed out in an August note to clients, it’s telling that no one is clambering to snap up the company right now.
“The fact that no ‘white knight’ has materialised despite its market cap collapsing… speaks volumes of the poor fundamental appeal of this business in the eyes of third party bidders,” he said.
Additional reporting by Malique Morris
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Compiled by Diana Pearl.