Farfetch Awaits Next Great Challenge as EU Approves YNAP Deal

LONDON — Investors took some solace in the European Commission’s approval of a long-awaited deal that will see Richemont sell a majority stake in Yoox Net-a-porter to Farfetch and Alabbar.

On Monday, Farfetch shares surged as high as 16.5 percent to $1.84, but closed at $1.69. The stock is still down more than 60 percent in the year to date, and the underlying challenges at the online luxury platform remain.

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Shares in Compagnie Financière Richemont, which will hold a large minority share in YNAP after the deal closes, witnessed a more modest performance following the EU’s approval. The shares were down slightly to 104.15 Swiss francs at the close of trading on Monday.

As reported, Europe’s competition watchdog unconditionally cleared the acquisition by Farfetch of a 47.5 percent stake in Yoox Net-a-porter in a decision that had widely been expected. A 3.2 percent stake will go to Alabbar, YNAP’s longtime partner in the Middle East.

The approval comes seven months after the U.K. Competition and Markets Authority approved the transaction. Compagnie Financière Richemont said Monday the EU was the last regulatory authority required to provide clearance.

Richemont had planned to complete the deal later in the fourth quarter, although no date has yet been specified.

Richemont said the deal’s completion also remains subject to “certain other conditions” that the partners are working toward fulfilling.

The European Commission, which approved “joint control of YNAP” by Richemont and Farfetch, said the transaction “would not raise competition concerns, given its limited impact on competition in the markets where the companies are active.”

On completion of the deal, Richemont will hold a 49.3 percent stake in YNAP. Over the next five years, Farfetch is expected to acquire the entirety of YNAP, subject to a series of conditions.

In exchange, Richemont will receive Farfetch Class A ordinary shares, expected to represent 12 to 13 percent of Farfetch’s issued share capital.

The ultimate aim is to transform YNAP to a “neutral platform for the luxury industry, with no controlling shareholder,” a long-held ambition of Richemont chairman Johann Rupert.

When the deal was announced in August 2022 Rupert said that “it was never Richemont’s dream, or intention, to own an online business.” Rupert said Richemont originally took full control of YNAP because its former shareholders had wanted to sell their stakes.

Rupert added that the planned sale of YNAP to Farfetch would also allow Richemont “to deliver on its global digital strategy” and to focus on what it does best: build brand equity at Richemont’s luxury maisons, which range from Cartier, Van Cleef & Arpels and Panerai to Chloé, Alaïa and Dunhill.

The deal with Farfetch, Rupert has said, 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 online with help from tech-savvy Farfetch.

The sale will also benefit Richemont in other ways.

As part of the deal, Richemont and Farfetch have said they plan to work together to accelerate the quality and global penetration of the Richemont brands online.

Richemont will leverage Farfetch technology, with YNAP and the Richemont maisons adopting Farfetch Platform Solutions. The Richemont maisons will also sell via e-concessions on the Farfetch Marketplace.

jose neves
José Neves

At Richemont the wheels are already in motion: In the first six months of fiscal 2023, the luxury giant reported a loss of 766 million euros following the noncash write-down of assets linked to the proposed sale of a majority stake in YNAP.

The markets are widely in favor of the deal. For years, analysts had been telling Richemont to get rid of the unprofitable YNAP and focus on what it does best: hard luxury.

Meanwhile José Neves, founder and chief executive officer of Farfetch, has promised that his company’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. In fiscal 2022, GMV at Farfetch decreased 4 percent to $4.1 billion.

The deal will also provide Farfetch with a cash. In addition to selling its majority stake in YNAP, Richemont has promised millions in cash and a credit facility that YNAP’s owners will be free to draw upon for a decade.

According to the agreement, at completion of the initial stage of the deal, YNAP will be “free of financial debt” with a minimum of $290 million in cash on its balance sheet.

Richemont has also promised to make available, for up to 10 years, a committed credit facility for an additional $450 million that YNAP may draw upon “at its discretion, subject to certain conditions.”

YNAP and its rich dowry could not have come at a better time for Farfetch, which has seen its share price tumble due to a variety of factors, including the slowdown in luxury consumption and the return to shopping in physical stores post-pandemic.

As reported, the company’s market capitalization has sunk to roughly $620 million, less than half the $1.8 billion market cap it started the year with.

With a complex business model, and against a backdrop of slowing luxury growth, Farfetch has also been retrenching. Earlier this year, it abruptly exited the beauty business, eliminated 800 jobs, or about 11 percent of its workforce, and has been cutting costs.

Second-quarter revenues fell 1.3 percent to $572.1 million — below the $649 million analysts projected — and gross merchandise value was flat at just more than $1 billion. Adjusted losses before interest, taxes, depreciation and amortization widened to $30.6 million from $24.2 million.

Johann Rupert
Johann Rupert

The question remains whether Farfetch and its partners can deliver on their promise of creating the neutral platform for what is still a young industry and make it profitable.

Lauren Schenk, an analyst at Morgan Stanley, who cut her target price on the Farfetch stock to $5 from $20, still sees potential in the future.

“We continue to have confidence in Farfetch’s long-term opportunity and see a positively skewed risk/reward stock proposition,” she wrote in a research note to clients.

One investor, who spoke on condition of anonymity, also believes Farfetch has a great opportunity ahead.

“What we are witnessing in luxury now is a cyclical downturn. It is less about business’ fundamentals than it is about investors unwinding their positions in this sector. The idea of becoming the world’s largest platform for fashion and luxury still makes sense,” the person said.

Tom Nikic, an analyst at Wedbush Securities who has followed Farfetch since before it went public in 2018, still believes that Farfetch’s core business as the go-to place for online luxury “is really, really compelling.” What’s needed is focus, he said, and execution.

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