It was the year that Richemont moved on.
After years of carrying the loss-making Yoox Net-a-porter Group and listening to analysts and shareholders bemoan its drag on Compagnie Financière Richemont’s balance sheet, Johann Rupert finally struck a deal to sell a majority stake to Farfetch and Alabbar.
The complex deal will see the Richemont chairman realize his dream of transforming YNAP into a neutral, industry-wide platform, with no controlling shareholder. It will also shift toward a hybrid model with help from Farfetch Platform Solutions, a white label tech service for retailers of every size and scale.
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As part of the package, FPS will give the Richemont-owned Cartier, Van Cleef & Arpels, Chloé and other brands the digital firepower to improve their omnichannel client experience. Richemont brands will also open e-concessions on the Farfetch Marketplace.
“It was never Richemont’s dream, or intention, to own an online business,” said Rupert, adding that the luxury group originally took full control of YNAP because its former shareholders had wanted to sell their stakes.
Rupert said the planned sale of YNAP to Farfetch will allow Richemont “to deliver on its global digital strategy” and, at the same time, “focus on what it does best.” He said the plan is to continue building brand equity at the company’s luxury maisons, without having to worry about running a digital business.
The deal with Farfetch, he declared, will be “transformative for all of luxury and not for a select few. It will transform big and small companies throughout Europe” by allowing them to set up shop with help from tech-savvy Farfetch.
As for Farfetch, founder and chief executive officer José Neves said Farfetch’s tech will be “a game-changer for Richemont’s brands and allow them to operate in a hybrid marketplace that is open to the entire industry.”
The deal, he added, will double the gross merchandise value of Farfetch.
Both companies’ shares rose in the wake of the announcement on Aug. 24 and the same analysts who’d been lamenting YNAP’s lack of profitability gave the deal a thumbs-up.
Luca Solca of Bernstein said the alliance was a boon for Platform Solutions, which has become the backbone of the Farfetch business.
“We like FPS because it allows Farfetch to square the circle of achieving fast gross merchandise value growth while improving its bottom line. The YNAP deal appears as a major win for Farfetch, as it adds almost $3 billion of extra GMV, from YNAP, and from the participating Richemont brands,” wrote Solca.
In addition, he said that having megabrands such as Cartier in the Marketplace will help Farfetch generate much needed traffic.
“Megabrands can generate traffic for their own [websites] which is preferable for them, both in terms of economics and data. For Farfetch, having some of the best hard luxury brands could snowball smaller brands to join its Marketplace, too. It could lift [Farfetch’s] prospects in jewelry and watches even if hard luxury will not be as supportive as beauty or fashion in terms of consumer frequency of visit,” said Bernstein.
Neves agreed.
“The launch of the Richemont maisons’ e-concessions on the Farfetch Marketplace is a step change in our strategy for hard luxury, which represents more than 20 percent of the luxury industry globally, but just 3 percent of Farfetch sales, and is an area where we see much stronger customer demand relative to the supply we have had to date,” he said just after the deal was revealed in August.
Analysts also liked the look of the deal from Richemont’s end.
RBC Europe described the deal as “long-awaited” and “positive from Richemont’s perspective” in terms of earnings before interest and taxes margin gains. “It also enables the Richemont portfolio to return to a pureplay luxury group,” which the bank said could increase the value of its shares in relation to competitors such as LVMH Moët Hennessy Louis Vuitton and Hermès International.
Although activist shareholder Bluebell Capital Partners did not publicly comment on the YNAP deal, it had been agitating for Richemont to off-load the e-tailer and focus exclusively on hard luxury.
As Rupert was brokering the deal with Farfetch, he was also fending off Bluebell, which had wanted to make a slew of changes to the way Richemont operates and install one of its founders, Francesco Trapani, on the board.
At the Richemont annual general meeting in early September, shareholders voted against Trapani, and against a series of proposals aimed at giving holders of Richemont’s publicly traded “A” shares a bigger voice.
The deal with Farfetch is multilayered and will take years to play out. The partners are awaiting antitrust approval, which is expected to take up to one year. The initial stage is expected to complete before the end of calendar year 2023.
Farfetch and Alabbar, Richemont and Farfetch’s long-standing partner in the Gulf States, have agreed to acquire 47.5 percent and 3.2 percent, respectively, of YNAP, leaving Richemont holding 49.3 percent.
In exchange, Richemont will receive Farfetch shares, expected to represent 12 to 13 percent of Farfetch’s issued share capital.
YNAP will adopt Farfetch Platform Solutions while the individual Richemont brands will adopt Farfetch’s technology “to achieve efficiency, flexibility and speed in addressing our clients’ needs, getting our products to the right place, at the right time, and in a seamless manner,” Richemont said.
But getting out of YNAP didn’t have its financial consequences for Richemont. In its fiscal first half ended Sept. 30, Richemont booked a 2.9 billion euro loss from discontinued operations following a 2.7 billion euro, noncash writedown of YNAP net assets.
Ahead of the proposed deconsolidation, Richemont has reclassified YNAP as a “discontinued operation” on its books.
Although the public markets largely applauded the deal, Farfetch still has its work cut out and will need to convince Wall Street of its retail proposition and growth prospects.
Farfetch’s Capital Markets Day earlier this month, its first since going public in 2018, was the beginning of that process.
He presented his company as a collection of three connected businesses: Platform Solutions providing e-commerce capabilities third parties; the Marketplace connecting buyers and sellers via e-commerce, and the New Guards Group developing brands.
“We have absolutely built the global platform for luxury and we have a clear leadership position in the space,” Neves said.
“Farfetch is at the tipping point. We’re at the point where we’re going to start to leverage the investments of the past 14 years to continue on the path of growth, profitable growth and cash flow generation. And today is all about providing clarity to you on the building blocks of that road map,” he added.
Farfetch said by 2025 its gross merchandise value will be $10 billion, with an adjusted earnings before interest, taxes, depreciation and amortization margin of 10 percent. Platform Solutions will account for $4.3 billion of GMV and is expected to drive an EBITDA margin of about 20 percent. That’s huge compared with the Farfetch Marketplace division, which is set to generate an EBITDA margin of about 5 percent.
But the projection spooked investors, whose first reaction was to send shares of the company down 35 percent. In mid-December Farfetch was trading down 85 percent since the start of the year at around $4.66.
Farfetch has become something of a “show me” stock.
Ike Boruchow, an analyst at Wells Fargo, believes that the company will be a winner in the longer term. He said the projects offered up during Capital Markets day was “management ‘ripping off the Band-Aid’ and resetting growth expectations, while at the same time laying out a plan that leads to fairly compelling growth/profitability aspirations. All in, we remain very bullish on the story, but acknowledge bulls are going to need duration.…The stock is simply in a bad spot and any real inflection is at least 12 months away.”
That inflection, if it comes, should coincide with phase one of the YNAP deal, and could open a new chapter of growth for Farfetch.