If Farfetch goes private, is the Richemont deal dead?

Farfetch CEO José Neves is in talks to take the company private, The Telegraph reported on Tuesday, raising questions about its deal with Richemont to acquire a 47.5 per cent stake in Richemont-owned retailer Yoox Net-a-Porter (YNAP).

Farfetch declined to comment, and its third-quarter earnings call scheduled for Wednesday morning was cancelled.

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Under the proposed deal, which was approved by regulators last month but has not been finalised, Farfetch was supposed to acquire Richemont’s stake in YNAP and pay Richemont 64.2 million Farfetch shares (in place of cash). Richemont wrote down €2.7 billion as a result. Richemont and its maisons, along with YNAP, would adopt Farfetch Platform Solutions (FPS) as part of the deal. This arrangement means that Richemont’s payout is dependent on Farfetch’s share value — which was already on the decline. Shares have fallen 83 per cent in the last year. As of October, when the deal was approved, Richemont’s intended stake in Farfetch was valued at $120 million rather than the $615 million indicated at the time of the deal, according to UBS analyst Kunal Madhukar.

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Will Richemont back out?

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The company released a statement on Wednesday reminding shareholders that it “has no financial obligations towards Farfetch and notes that it does not envisage lending or investing into Farfetch”. In its statement, Richemont highlighted that neither its maisons nor YNAP had yet adopted FPS and that they remain separate.

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Farfetch’s shares initially rose over 20 per cent following The Telegraph’s report, but after Richemont’s response and Farfetch’s release stating it would not publish quarterly results or issue guidance on Wednesday, shares dropped back down 16 per cent. “This seemed to confirm that a financial operation on the company’s capital was being discussed involving its top management,” said Oddo BHF analysts Emira Sagaama and Jean Danjou in a note. Richemont declined to share additional comments but emphasised that it is carefully monitoring the situation and reviewing its options.

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Should Farfetch delist?

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Analysts say the rumoured delisting is a bid to bring operations out of the public eye — perhaps in order to reset.

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Farfetch has consistently posted significant losses, hurting its overall valuation. Last quarter, revenues fell 1.3 per cent year-on-year, missing analyst expectations by 12 per cent. Over the past year, performance has fluctuated on unsteady performance in both the US and China, where aspirational consumer ambivalence and a slow in post-lockdown retaliatory spend, respectively, have made a dent. Farfetch has also failed to prioritise businesses such as its New Guards Group, experts argue. Its once-leading Platform Solutions offerings is now up against competition that didn’t exist when it launched, says Jessica Ramirez, senior analyst at research firm Jane Hali and Associates.

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“There are some very strong parts of Farfetch. But I think a lot of the investors have really questioned the business and the decisions that they’ve taken over the years they have been public,” says Ramirez. “This makes sense to pull back and focus on what they want to focus on.”

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She points to Farfetch’s many ventures across its verticals (including Marketplace and FPS) and other businesses (including Browns and Stadium Goods, and its New Guards Group platform) as needing refining in their positioning. Farfetch has to tackle all of this in a difficult macro environment, she adds. “[Farfetch] made it a hard business for investors to get their heads around. In the private eye, you’re able to reset your company with your own expectations.”

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Liquidity is also fragile and expected to be at risk by 2027, according to research by Societe Generale. “The reason why Farfetch is considering withdrawing from the public markets is — in my opinion — that they need more cash to stay in business. Hence, they need investors willing to put more capital at risk — and if they put capital, they want to own the company or have a majority, I expect,” says Luca Solca, senior analyst at Bernstein covering global luxury goods. “There is logic in this madness. I would presume that, if this happens, José Neves may be joined by other investors — and I expect these investors may want to call the shots given the Farfetch track record so far.”

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What will happen to the deal?

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Richemont is well-positioned, experts say. “The fact that Richemont is not entangled with the Farfetch situation is excellent news for Richemont investors,” says Solca. “We shall see what developments are to be expected on the Farfetch front.”

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In the event that Richemont backs away from the deal altogether, analysts seem relatively positive in terms of what it means for the Swiss conglomerate. “So far, the risk for Richemont shareholders was that for this agreement to hold, the group could have to support Farfetch financially. It now seems the risk is shifting towards Richemont no longer relinquishing control of YNAP,” said Sagaama and Danjou. “The reintegration of YNAP would be far from ideal, but given the modest size of the losses reported within the context of the group (we estimate the pre-tax loss on YNAP at about €200 million a year), we think it would be a better solution than becoming embroiled in the Farfetch situation.”

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For Farfetch, however, analysts say that keeping the deal is the best option, if it’s still able to clear. “An ownership change would likely trigger a review of the deal and might add a layer of complexity. Plus, the potential new owner would likely have to commit to paying Richemont for the remaining 50 per cent of YNAP in five years,” said Bank of America analysts Geoffroy de Mendez, Ashley Wallace, Adam Gildea, Daria Nasledysheva and David Roux in a note. While cancelling the deal would make it easier to take Farfetch private, that might hinder FPS, they say.

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If keeping the deal is in Farfetch’s best interest and axing it is in Richemont’s, a resolution will likely be challenging. If the deal does go ahead, it’s likely to look very different than the initial agreement, Ramirez says. “They would have to reset what that deal looks like going through, in terms of cost and what each party can take away from it. If it happens, it’s not going to be the deal we originally expected.”