The Farfetch-YNAP deal is on. But how will the terms change?

Farfetch can proceed with its acquisition of a 47.5 per cent stake in Richemont-owned online luxury fashion retailer Yoox Net-A-Porter (YNAP), European Union antitrust regulators ruled today.

​

But the details of the complicated deal are far from certain. Farfetch’s share price has plummeted by 83 per cent since the plan was announced back in August 2022. A renegotiation of the terms is expected by analysts.

​

Under the current plan, Farfetch is to acquire the stake from Richemont, the Switzerland-based luxury conglomerate, which owns brands such as Cartier, Chloé and Alaïa. Farfetch is set to pay Richemont with 64.2 million Farfetch shares, rather than cash. Richemont has written down €2.7 billion as a result. Richemont is therefore at the short end of the stick: its intended stake in Farfetch is now valued at $120 million rather than $615 million, according to UBS analyst Kunal Madhukar.

Small surprise the deal is subject to conditions that Richemont and Farfetch are determining. A “further announcement” will be made in due course, according to a statement.

​

What could change?

​

“The market continues to worry about the ability of Richemont to close the deal and fully de-consolidate the loss-making YNAP business,” says UBS analyst Zuzanna Pusz in a note. “As such today’s announcement could provide a bit of a relief for investors. Nevertheless, the financial performance of Farfetch since the deal was announced continues to be seen as the main obstacle, with investors worried about Richemont tying itself to a struggling platform and the consequences of such a move in the long-term.”

​

Ultimately, Pusz believes the deal will go through. “We remain of the view that Richemont is fully committed to exiting the online distribution business, one way or the other, and see no risk of the asset returning to Richemont’s operations.”

 

As part of the deal, Mohamed Alabbar’s investment vehicle Symphony Global will acquire a 3.2 per cent stake in YNAP from Richemont so that it becomes a neutral platform, allowing Richemont to de-consolidate it as an asset (which has held back Richemont’s valuation).

​

Richemont’s brands will also join the Farfetch marketplace, while YNAP and the Richemont maisons will adopt white label e-commerce platform Farfetch Platform Solutions. Farfetch will have the opportunity to buy YNAP in its entirety within the next three to five years.

​

Where did Farfetch go wrong?

​

At the time of the announcement of the original deal in August last year, it was hailed as confirmation of Farfetch’s market dominance and of the success of CEO José Neves’s vision to revolutionise the digital landscape in luxury. The acquisition of a stake in YNAP, a major competitor, signalled that Farfetch had the potential to dominate the market. Farfetch shares rose 24 per cent following the announcement and its market cap topped $26 billion.

​

Today, its market cap sits at $636.7 million. In August, the company reported a decline in growth year-on-year; revenues fell 1.3 per cent year-on-year to $572 million in the second quarter of 2023. This year, Farfetch’s revenues have shown both growth and dips as key regions China and the US have fluctuated in performance. In a competitive market, Farfetch felt the impact of a slowdown in post-lockdown retaliatory spending in China and an aspirational luxury consumer pullback in the US.

​

While Matchesfashion and Ssense have also struggled, Farfetch has challenges specific to its business model. Investors have found its diversification problematic. When Farfetch launched, its technology solutions were a key differentiator, but since then it has launched its white label solution and its own marketplace besides acquiring New Guards Group, which includes streetwear labels such as Off-White, Palm Angels and Opening Ceremony.

​

“Farfetch includes three separate businesses, and, while each individual business is a smart investment, investors have felt there’s an overall lack of focus,” says Jessica Ramirez, senior research analyst at Jane Hali & Associates. “They purchased strong streetwear brands with New Guards Group but I don’t feel that they’ve been a priority. There was just too much going on; it’s almost like Farfetch set itself up for failure.”

​

Farfetch has been scrambling to cut costs. Three months ago, it shuttered its beauty business. Just this week, it emerged that the company is exploring options for the sale of LA-based beauty retailer Violet Grey, which Farfetch acquired in January 2022 — another sign of disappointment around Farfetch’s venture into beauty. Earlier this year, the company laid off 11 per cent of its total headcount.

During a Q2 earnings call, Neves described cost-cutting measures as the most significant in Farfetch’s history. Analyst Jessica Ramirez says selling New Guards Group could be a next step. Farfetch, Richemont and YNAP declined to comment.

​

Ramirez says Farfetch Platform Solutions “probably should have been the focus because that’s what they’re really good at”. However, she qualifies this by pointing out that, since Covid, luxury brands have invested more in digital and developed their own platforms. In contrast to the challenging retail landscape, Mytheresa is faring well with a curated product assortment and an unrelenting focus on higher-priced categories and high net worth consumers. Ramirez says this level of focus – customer-centric and old-school – offers lessons for both Farfetch and YNAP.

​

Analysts agree that a renegotiation driven by Richemont is likely. Ramirez puts it bluntly: “I wouldn’t be surprised if they renegotiate the deal, and – as they do that – for Farfetch to restructure how it does its business because it feels like something has to be done.”