Richemont, Farfetch Shares Climb on YNAP Deal

LONDON – The deal unveiled Wednesday for Compagnie Financiere Richemont to sell a majority stake in Yoox Net-a-Porter to Farfetch and Mohamed Alabbar got a firm thumbs-up from the stock market.

The market seemed to view Farfetch as the main beneficiary of the agreement, with the platform’s shares leaping 21.3 percent on the New York Stock Exchange to close at $9.51. Richemont’s shares, meanwhile, increased 3.6 percent on the Swiss Stock Exchange to close at 113.90 Swiss francs.

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The proposed agreement enables Richemont to unload YNAP, its ownership of which had become increasingly criticized by analysts and activist investors. Cartier’s parent said Wednesday that Richemont, Farfetch and Symphony Global, one of the investment vehicles of Mohamed Alabbar, had entered into “a landmark transaction” that will see Farfetch and Alabbar acquire a 47.5 percent stake, and 3.2 percent stake, respectively, in YNAP.

Farfetch will then acquire 100 percent of YNAP in three years’ time, subject to certain conditions.

As part of the complex partnership deal, Richemont will be taking a non-cash write down of around 2.7 billion euros, which Richemont’s chairman and founder Johann Rupert said was worth every cent.

“The benefits of this deal far outweigh the non-cash write-down,” he said during a conference call on Wednesday morning.

After the sale of the initial 47.5 percent stake in YNAP – which is expected to be completed by the end of the 2023 fiscal year – Richemont is set to receive between 53 and 58.5 million Class A ordinary shares in Farfetch.

The shares are expected to represent between 10 and 11 percent of the fully diluted share capital of Farfetch, and 12 to 13 percent of the issued share capital.

Five years after this, Richemont will also receive a further $250 million, which is expected to be settled via an additional million Class A ordinary shares of Farfetch.

The YNAP leadership will also change, with a new chief executive officer appointed, as well as a 7-person board comprising three Richemont appointees, a further three from Farfetch and one from Alabbar.

At that time, YNAP will “be free of financial debt, with a minimum of $290 million of cash on its balance sheet,” and get access under conditions to a $450 million committed credit line from Richemont.

If conditions for the full sale are not reached, which includes a goal of positive adjusted EBITDA for three out of four consecutive quarters, a divestment clause could see YNAP sold to a third-party or head to an IPO.

The agreement also sees Richemont and YNAP adopting Farfetch Platform Solutions, which means the companies will be able to leverage Farfetch’s digital expertise.

“This represents a significant step in achieving Richemont’s vision of making YNAP a neutral industry-wide platform, and, through a put and call option mechanism, lays a path towards Farfetch potentially acquiring the remaining shares in YNAP, bringing together these highly complementary businesses. The partnership also marks a step change in Richemont maisons’ omnichannel distribution capabilities,” Richemont said Wednesday.

The luxury giant, owner of brands including Cartier, IWC and Van Cleef & Arpels, said the partnership will mean that Richemont and YNAP can leverage Farfetch’s technology platform to advance its Luxury New Retail program.

Furthermore, YNAP will adopt Farfetch Platform Solutions to facilitate its shift towards a hybrid retail-marketplace model.

Richemont said it will use the Farfetch platform to advance the delivery of the omnichannel strategy of its brands. As part of the deal, they will join the Farfetch marketplace, boosting, among other categories, Farfetch’s current watches and jewelry offering.

Richemont said the Farfetch platform is “well-positioned to deliver end-to-end capabilities for the luxury industry,” and it “envisions further collaboration on innovative technology solutions to be made available to luxury brands and retailers to meet the increasing omnichannel demands of the luxury customer.”

A planned partnership between YNAP and Farfetch was announced by Rupert late last year, and fulfils Rupert’s ambition of creating a neutral platform (with multiple owners) for luxury digital sales, and a way for all of Richemont’s brands to improve their online offer.

Last November, when he first talked about partnering with Farfetch on an open and neutral platform, Rupert said that was high time that YNAP explored alternatives to its linear business model, such as a marketplace, which wouldn’t necessarily require it to hold inventory.

Furthermore, this latest deal also allows Richemont to forge ahead without the YNAP business, which had been a drag on the luxury group’s bottom line.

Rupert said the announcement was a “significant step towards the realization of a dream I first voiced in 2015 of building an independent, neutral online platform for the luxury industry that would be highly attractive to both luxury brands and their discerning clientele.”

“We knew back then that if we wished to control our own destiny and protect the uniqueness of the luxury industry as it was digitalized, we would need to collaborate as the task was too big to undertake on our own,” he said.

José Neves, Farfetch founder, chairman and CEO, said that his company was “excited to acquire 47.5 percent of YNAP and partner with Richemont in YNAP’s transformation into a hybrid business model which we believe will drive strong growth and profitability for YNAP.”

“This investment and work we will do with Farfetch Platform Solutions for YNAP will pave the way to a potential acquisition by Farfetch, which would create a complementary portfolio of iconic luxury destinations, appealing to different demographics, price points and regions,” he said.

As part of this deal, most of Richemont’s portfolio of houses will use Farfetch Platform Solutions to create an omnichannel client experience that fuses their e-commerce operations with their physical retail networks by the end of the first stage of the transaction.

The brands involved include A. Lange & Söhne, Alaïa, Baume & Mercier, Buccellati, Cartier, Chloé, Delvaux, dunhill, IWC Schaffhausen, Jaeger-LeCoultre, Montblanc, Panerai, Piaget, Purdey, Roger Dubuis, Serapian, Vacheron Constantin and Van Cleef & Arpels.

In addition, fashion houses AZ Factory and Chloé, jewelers Cartier and Van Cleef & Arpels as well as luxury watchmakers Vacheron Constantin and Jaeger-LeCoultre are expected to launch e-concessions on Farfetch’s marketplace.

During the call on Wednesday morning, Rupert and Neves said the deal would add digital firepower to the Richemont brands, and to other luxury brands that wanted to join the new, and open, ecommerce platform.

“Our technology 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,” said Neves, adding that the agreed deal will double the gross merchandise value of Farfetch.

Rupert said he was excited about the deal, and about Richemont’s future now that YNAP is hitched to Farfetch.

“It was never Richemont’s dream, or intention, to own an online business,” said Rupert, arguing that Richemont originally took full control of YNAP because its former shareholders had wanted to sell their stakes.

“And I have been pleading for seven years to have a neutral digital sales platform” that any brand could join, he added.

Rupert said the Richemont and Farfetch management teams were already familiar with each other thanks to various joint ventures and partnerships, and work well together.

Nearly two years ago, Richemont inked a mega-alliance with Alibaba, Artemis  and Farfetch with the aim of providing European luxury brands with “enhanced access” to the China market.

As part of the deal, Farfetch launched on Alibaba’s luxury platforms in China.

On Wednesday, Rupert said that Farfetch was the best partner possible for YNAP, and would offer first-class tech support and cooperation.

Rupert added that the planned sale of YNAP to Farfetch will allow “Richemont to do what it does best, and build brand equity,” at its luxury maisons, without having to worry about running a digital business.

He also said that a great impetus behind the deal was Richemont’s own maisons, “which have been eager to re-platform.”

The deal with Farfetch, he declared, would be “transformative for all of luxury and not for a select few. It will transform big and small companies throughout Europe.”

Asked about the outlook for luxury, Rupert said that he expects China to “unlock” after next winter, and urged analysts and press not to underestimate the war in Ukraine. He said he’s concerned about rising energy prices and wheat prices as well.

“Wheat prices lead to revolutions and mass migration,” he said. Rupert added that, nonetheless, he was confident about the future of the luxury industry.

Neves added that he was confident about luxury’s future, and cannot wait to get started on the YNAP project.

He said that Farfetch plans to replatform all of the brands to a hybrid business model “as soon as possible,” describing the luxury industry as “resilient” and ready to evolve.

In a later analyst call on Wednesday, not attended by Rupert, Neves said Farfetch and Richemont were “fully aligned” in their goal to make YNAP “incredibly lean, efficient and profitable.”

Further details on the roadmap for this “transformational long-term partnership,” which Neves deemed as marking “an inflection in the Farfetch mission” and a “breakthrough in hard luxury,” included the repositioning of Yoox from its off-price to an “end-of-cycle and circular fashion destination.”

Questions from analysts centered on the FPS side of Farfetch’s business, which Neves said was and would continue to be profitable, with an expected positive EBITA and cash impact in 2023, even as the platforms for the incoming Richemont brands are built.

With the complementary profiles of the Farfetch and YNAP retail brands, the resulting retail behemoth will continue to see growth, expected Neves.

Following the initial announcement, the move was described as “very good news for both companies” by Luca Solca, senior research analyst of global luxury goods at Bernstein.

He pointed out that the agreed sale of YNAP removed “a continuing source of losses and a depressing factor on Richemont’s financial performance and multiple” while Farfetch nets the second place in global multi-brand digital distribution as well as the $450 million credit line for 10 years.

A Jefferies note, however, pointed out that none of the parties would be keen to consolidate YNAP, as Richemont’s remaining stake would be requalified as an “asset held for sale” and Farfetch’s remains non-controlling; the eventual discontinuation of the Online Flagship Store solution used by Valentino and Armani; an apparent discrepancy between Richemont’s year 3 to year 5 timeframe for its put option and Farfetch’s call option, open anytime through to year 5.

Farfetch will be releasing its Q2 results on Thursday.

The YNAP sale is expected to be a talking point at Richemont’s upcoming annual general meeting on Sept. 7, where proposals by the activist investor Bluebell to install hard luxury veteran Francesco Trapani on the board and changes its board makeup will be put to a vote.

Richemont issued a separate statement on Wednesday saying it stood by its recommendation to shareholders to vote against Trapani.

In response to a request from Bluebell, Richemont reiterated its opinion that Trapani is an “inappropriate candidate for election to the board” given his long history with LVMH Moet Hennessy Louis Vuitton.

Richemont said that, if there should be one director who is designated as representative of holders of its publicly-quoted “A” shares, it should be its proposed candidate, Wendy Luhabe.

Institutional Shareholder Services Inc., an advisor to companies and shareholders on corporate governance and investing, gave the thumbs down to Trapani, telling Richemont shareholders that he would not serve their interests.