WSJ : Borrowing Among Junk-Rated Firms Slows to a Trickle

Borrowing Among Junk-Rated Firms Slows to a Trickle
A combination of higher funding costs and ratings upgrades trims the supply of high-yield bonds

Companies with speculative-grade credit ratings have slowed their pace of borrowing, illustrating how rising interest rates have upended the pandemic-driven boom.

Junk-rated companies have raised roughly $74 billion so far this year, just a quarter of the nearly $300 billion from the same period last year, according to Refinitiv.

That has led to an $80 billion drop in the net supply of high-yield bonds, a figure that is expected to grow to $130 billion by the end of the year, according to Goldman Sachs Group Inc. GS 0.06%▲ Such a fall would mark the biggest annual decline on record.

Yet the market isn’t ringing alarm bells.

The extra yield investors demand to hold junk bonds over U.S. Treasurys has risen to 5 percentage points from 3.1 points in January. That is well below the recent high of 11 points in March 2020.

Historically, the spread averages between 3.75 and 4.5 points, according to Seth Meyer, portfolio manager at Janus Henderson Investors.

“The market is implying some level of stress, but no reason to panic,” he said.

High-yield bonds trading in the secondary market still total a lofty $1.4 trillion, fueled by the nearly $900 billion in new junk bonds that came to the market in 2020 and 2021. Back then, easy monetary conditions during the Covid-19 pandemic allowed companies to raise cash cheaply and reduce their overall debt.

Higher funding costs are now discouraging some companies from issuing debt as the Federal Reserve rapidly raises interest rates and tightens financial conditions. The yield-to-worst, or the lowest rate an investor can expect to earn short of a default, on the USD High Yield index recently hit 8.62% before easing to 7.92% last week. That is up sharply from 4.2% at the start of the year.

Ratings upgrades have contributed to the declining supply as well. Roughly $64 billion of bonds have migrated into investment-grade territory from speculative status, while only $19 billion of bonds that were investment grade have been downgraded to junk.

Accelerating inflation and higher interest rates began to put pressure on speculative bonds at the start of the year when stocks and bonds fell in lockstep. Investors pulled about $45 billion from high-yield bond funds in the first half, the highest two-quarter total since at least 1992, according to Refinitiv.

So far this year, high-yield bonds have fallen 10%, while investment-grade-rated bonds have dropped 14%. Despite the worrying economic backdrop, junk bonds outperformed their higher-rated peers this year.

“This is the best high-yield bond market in over two decades, in terms of credit quality and liquidity positions” said Lotfi Karoui, chief credit strategist and head of credit research at Goldman. “This is not an old-fashioned, corporate-led recession. Fundamentally, the high-yield market is in good shape.”

Bonds rated double-B, which are one notch below investment grade, comprise 53% of the high-yield space. That is up 10 percentage points from a decade ago, according to the Intercontinental Exchange ICE -0.14%▼. Bonds in the lowest category, triple-C, have dropped to just 11% of the total high-yield market, near historic lows.

Energy companies, the largest constituents of the high-yield universe, weighed on the asset class in previous years. But macroeconomic drivers such as the Russia-Ukraine war and a resurgence in demand for oil sent energy stocks soaring in the first half of the year, even as the broader market dropped sharply.

“Energy firms have deleveraged aggressively, and many posted record performances this year,” said John McClain, portfolio manager for high-yield and corporate credit strategies at Brandywine Global. “They are far more focused on returning cash to shareholders now than in the past.”

Callon Petroleum Co. CPE 6.67%▲ was one of the few high-yield companies to issue debt in the second quarter. The Texas-based oil and natural-gas company issued a $600 million bond at 7.5% last month to help fund redemptions of existing debt due to mature soon. The securities redeemed include a bond that paid 6.125% due in 2024, and a riskier so-called second lien loan that paid 9%, due in 2025.

Pointing to an improved leverage profile, Fitch assigned B-plus ratings to that issue and the company’s previous issue, a higher mark than Callon’s long-term B rating.

“We were able to lower our overall interest-rate expense and improve our long-term debt structure,” said Kevin Smith, director of investor relations at Callon Petroleum.

Elsewhere, Delta Air Lines Inc. DAL 0.19%▲ recently unveiled a $1.5 billion tender offer to repurchase several bonds due over the course of the next few years, with coupon rates ranging from 3.800% to 7.375%.

“Delta Air Lines’ tender is focused on higher coupons, but shows there is still a lot of balance-sheet maintenance to be done in the high-yield space,” said Mr. Meyer of Janus Henderson Investors.

FT : Aviation sector will be disrupted for years, Qatar Airways boss says

Aviation sector will be disrupted for years, Qatar Airways boss says
Staff shortages in Europe are affecting the carrier most as the industry struggles to shake off pandemic impact

The chief executive of Qatar Airways has warned that disruption across the aviation industry will last for years as companies recover from the effects of the pandemic.

“Covid has damaged the supply chain of the industry . . . I think that it will last for a couple of years — it is not going to go away tomorrow,” Akbar Al Baker told the Financial Times in an interview.

Labour shortages in Europe, delays in aircraft deliveries from manufacturers and a lack of spare parts had all affected Qatar Airways, he added.

Guillaume Faury, chief executive of the world’s largest plane maker Airbus, last week said he expected supply chain issues to continue into next year, with manufacturers facing shortages of raw materials, spare parts and electronic components.

In the case of Qatar Airways, it is the staff shortages in Europe that are having the greatest impact, Al Baker said, because of disruption to flights that is having knock-on effects on the airline’s Doha hub.

This month Heathrow airport imposed an unprecedented passenger cap on airlines to try to avoid more disruption, drawing a furious reaction from Qatar’s regional rival Emirates.

Al Baker sits on the board of London’s Heathrow as a representative of the Qatari sovereign wealth fund, a shareholder in the airport.

He criticised Heathrow for not giving airlines more warning about the passenger cap, which he said was “very difficult to digest”. But he added that the problems were systemic across Europe, and not only at Heathrow.

Qatar Airways is also the largest shareholder in IAG, which owns British Airways, making Al Baker an influential figure in UK aviation.

He has previously been outspoken in his criticism of BA, but offered his full support to the airline’s chief executive Sean Doyle. BA has suffered some of the worst disruption this summer.

“IAG has a huge potential, and I’m sure that in a not too long time they will turn around and be what they were pre-pandemic,” he said. “Keep in mind that they are doing a lot to improve standards and services,” he added.

IAG’s shares are trading at about 70 per cent below their pre-pandemic levels, and BA has been forced to cancel around 30,000 flights this year because of its own staffing problems and disruption at airports.

Al Baker has also been involved in a legal battle with Airbus this year over an allegation that one of its best-selling planes, the A350 wide-body, is defective because of damage to its surface.

He said the dispute, which is being heard in London’s courts, will not stop him from buying more Airbus aircraft in the future.

The manufacturer has said its aircraft are safe, pointing out that no other operator of the jets had grounded their planes.

Despite the pandemic and supply chain problems, Qatar Airways reported a rare industry profit of $1.5bn in the year to the end of March, boosted by its cargo operations.

The airline continued to fly throughout the pandemic and even added routes to many destinations.

FT : Gold Fields defends $5.2bn Yamana bid

Gold Fields defends $5.2bn Yamana bid
South African miner says Canadian target at risk of being snapped up by rivals

The chief executive of South African miner Gold Fields has defended the timing of its $5.2bn bid for Yamana Gold, arguing the “opportunity” to create the sector’s fourth biggest producer might have disappeared if it had waited.

Chris Griffith said Gold Fields was aware that Yamana had talked to other companies as it prepared its all-stock offer.

“We know that other companies are interested in some of the assets,” he said in an interview with the Financial Times. “So I think it is not a certainty these assets will be around in two to three years’ time.”

Shares in Gold Fields slumped 20 per cent on the day the deal was announced in May, with investors alarmed at the 34 per cent premium offered for Toronto-listed Yamana.

Redwheel — a top investor in Gold Fields, which controls 3 per cent for clients — called on Griffith to withdraw the offer and focus on its “excellent organic growth options”, which include the Salares Norte gold mine in Chile, where production is due to start early next year. Redwheel said Gold Fields has “ample time to be opportunistic over the next few years rather than rushing into a significantly dilutive acquisition today”.

If the deal goes ahead Gold Fields shareholders will end up holding 61 per cent of the combined company, which will have a market capitalisation of more than $12bn at current prices.

Griffith, who became chief executive in April 2021, said he always knew the deal would require “substantial engagement” with investors. “Many of the Gold Fields shareholders don’t really know Yamana and the Yamana assets, and likewise with Yamana, many of them won’t know Gold Fields,” he said. “We still see a really, really strong underlying strategic rationale for this deal.”

Gold Fields, which was founded in 1887, argues that buying Yamana will add operations in Canada, Argentina, Chile and Brazil, and provide the Johannesburg-listed company with an extensive exploration pipeline to complement its portfolio of cash generative but mature mines.

Gold Fields will produce 2.3mn ounces of gold this year, rising to 2.8mn in 2024. However, this will fall to as low as 2.1mn by 2030 without a deal because of a natural decline in production.

Griffith said the offer price for Yamana was determined after a seven month due diligence process, and that it had to offer a large premium because the Canadian company was trading at a discount to net asset value and investors would have baulked at a lower price. Yamana is currently trading at a 12 per cent discount to the terms of the offer, a signal that some investors do not believe the deal will happen.

For the deal to go ahead, the transaction requires 67 per cent approval from Yamana shareholders and 75 per cent approval from Gold Fields investors at meetings later this year.

Griffith said he was confident that Gold Fields’ biggest shareholder, South Africa’s state asset manager Public Investment Corporation, would vote in favour of the transaction. “All the discussions that we’ve had with the PIC have been positive,” he said.

However, if the deal is voted down Griffith said Gold Fields would not be on the hook for a $450mn break fee and would continue to look for deals to underpin future growth.

“I think it would be a shame if this was voted down but it doesn’t mean that we are out of options and we can’t look at other options,” he said. “But they will not be . . . in our view of the same quality.”

FT : Beijing detains high-flying Tsinghua semiconductor boss, report says

Beijing detains high-flying Tsinghua semiconductor boss, report says
Former Xinjiang shepherd Zhao Weiguo is latest aggressive dealmaker to fall foul of Xi Jinping’s government

Zhao Weiguo, the former head of an expansive Chinese conglomerate with state backing and deep investments in the global technology sector, has been placed under investigation by officials in Beijing, according to local media.

The 54-year-old, who led cash-strapped chipmaking giant Tsinghua Unigroup for a decade, has been out of contact after being taken from his home by authorities in mid-July, reported Caixin, a Chinese business publication.

The Financial Times has not independently verified the case. Tsinghua did not immediately comment. No further details on the investigation were provided.

The report of Zhao’s detention follows years of intensifying scrutiny of state-backed Tsinghua by investors and the Chinese government after Zhao struggled to repay and refinance the company’s large debts.

The company originated from Beijing’s Tsinghua University, China’s most prestigious engineering school, in the late 1980s. Zhao took control in 2009.

He climbed from obscurity herding animals in Xinjiang, China’s western region, to study at Tsinghua in the 1980s. He went on to make a fortune in property and forged ties with senior members of the Chinese government.

Zhao especially benefited from state support during the administration of Hu Jintao and is believed to maintain a close personal relationship with the former president’s son, Hu Haifeng, according to analysis by Cercius Group, a Montreal-headquartered consultancy specialising in elite Chinese politics. Zhao has denied ties to Hu Haifeng.

His standing with Beijing has been clouded by tensions between Hu Jintao and China’s current president Xi Jinping, the country’s most powerful leader in a generation.

Still, as recently as 2017, the group secured about $22bn from state investors to fund its computer chip acquisitions.

But Tsinghua defaulted on a domestic bond in late 2020. Its total liabilities were estimated at more than $31bn. The default shocked investors given the company’s ties to the Chinese state, and it entered a court-ordered restructuring last year.

Under Zhao, the company bought French chipmaker Linxens and took a majority stake in data networking business H3C from Hewlett-Packard. Attempts at multi-billion-dollar acquisitions of US tech groups Micron Technology and Western Digital failed.

But following years of uncertainty over its future, the company said in a filing this month that it was officially under the ownership of new investors including private sector groups Wise Road Capital and Beijing Jianguang Asset Management, as well as a number of state-affiliated funds. Taiwan’s Foxconn, an Apple supplier and tech assembly giant, has taken a stake in the group via Wise.

Zhao’s downfall also marks the latest in a series of epic corporate collapses among a clutch of previously aggressive Chinese dealmakers, including state-backed group CEFC, insurer Anbang, travel-to-finance conglomerate HNA and financier Tomorrow Group.

Some of the highest-profile billionaires behind China’s debt-fuelled acquisition spree of the past decade have been subsequently jailed or detained, usually on charges relating to corruption.

They include CEFC founder Ye Jianming, Anbang chair Wu Xiaohui as well as HNA chair Chen Feng and chief executive Adam Tan and Tomorrow Group boss Xiao Jianhua.

While many of the tycoons chased foreign property and other prestige acquisitions, Zhao’s investments more closely tracked one of Beijing’s core industrial policy ambitions: for China to be free from its dependence on foreign-made computer chips.

Several of China’s most promising chipmaking groups are in Tsinghua’s stable, including Yangtze Memory Technologies, which aims to rival South Korea’s Samsung and SK Hynix in memory chips.

YMTC, which was founded in 2016 and enjoys state backing, has already more than tripled its production to nearly 5 per cent of the global market. However, the Wuhan-based company has caught the attention of the Biden administration, which is probing whether it supplied Huawei with chips in a potential violation of US export controls.

>>> US After Hours Summary: WMT -10% falls on lowered profit outlook, takes othe

After Hours Summary: WMT -10% falls on lowered profit outlook, takes other retailers with it TGT -5.2%; FFIV +5.7%, WIRE +5.6%, TBI +4.9% higher on earnings

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: LBRT +8.9%, FFIV +5.7% (also increases share repurchase program by $1 bln), WIRE +5.6%, AIN +5.2%, TBI +4.9%, CALX +4.7%, CDNS +3.6%, CLS +2.9%, KREF +2.5%, CR +1.6%, SSD +1.3%, ARE +1.2%, NTB +1.2%, PCH +1.2%, WHR +1.2%, HSTM +0.4%, RRC +0.3%, SUI +0.3%, LOGI +0.2%, MEDP +0.2%, BRO +0.1%, NPTN +0.1%

Companies trading higher in after hours in reaction to news: SHLX +9.8% (Shell USA to acquire all units in SHLX held by public at $15.85/unit, total value $1.96 bln), IRTC +3.1% (names new CFO), HYLN +1.8% (Ruan orders 10 units of Hypertruck ERX), JNPR +1% (in sympathy with strong FFIV earnings), PEAR +0.7% (to restructure ops, announces planned workforce reductions)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: AAN -22.5%, ALGT -18.5% (guides Q2 revs below consensus), WMT -10% (lowers profit outlook for Q2 and FY23), PETS -8.2%, HXL -6.4%, UHS -4.6%, BDN -3.2%, KALU -3.2%, AGNC -2.7%, NXPI -2.1%, CADE -0.3%, PKG -0.2%

Companies trading lower in after hours in reaction to news: LEGN -6.9% (stock offering), WAB -5.3% (discloses cyber security incident), TGT -5.2% (In sympathy with WMT lowering guidance), CONN -5% (In sympathy with WMT lowering guidance), DLTR -4% (In sympathy with WMT lowering guidance), M -4% (In sympathy with WMT lowering guidance), DG -3.7% (In sympathy with WMT lowering guidance), AMZN -3.6% (In sympathy with WMT lowering guidance), KSS -3.5% (In sympathy with WMT lowering guidance), ROST -3.5% (In sympathy with WMT lowering guidance), JWN -3.4% (In sympathy with WMT lowering guidance), TJX -3.1% (In sympathy with WMT lowering guidance), DKL -1.9% (increases dividend), NKTX -1.8% (announces key senior leadership appointments), VERV -1.3% (closes upsized 9.58 mln offering), BURL -0.8% (In sympathy with WMT lowering guidance), CSCO -0.1% (in sympathy with strong FFIV earnings)

>>> US Close Dow +0,28% S&P +0,13% Nasdaq -0,43% Russell +0,60%

Closing Stock Market Summary

The market opened on a soft note today as market participants were playing a waiting game for the busy week ahead. The three main indices saw choppy action, albeit within a narrow range, in the first half of the session until finding downside momentum and declining through most of the afternoon. The market was able to rally in the last half hour of trading to close well above session lows.sdaq -0,43%

There are several market-moving catalysts on the docket this week. 175 S&P 500 companies, which make up nearly 50% of the index's market cap, are set to report earnings this week. Key economic data includes the advanced Q2 GDP reading on Thursday, and the June Personal Income and Spending report on Friday. The Personal Spending and Income report will include the Fed's preferred inflation gauge, the PCE and core-PCE price indexes. Also, the FOMC decision will be announced Wednesday. 

Market breadth showed a lack of conviction on either side of the tape today. At the close, advancers led decliners by a 3-to-2 margin at the NYSE while advancers were roughly in line with decliners at the Nasdaq.

With mixed buying interest today, it was the mega caps that drove the market lower. The Vanguard Mega Cap Growth ETF (MGK) closed down 0.6% versus a 0.1% gain in the S&P 500 and a 0.3% gain in the Invesco S&P 500 Equal Weight ETF (RSP). 

This relative weakness in the mega caps showed up in the S&P 500 sector performance. Amazon.com (AMZN 121.14, -1.28, -1.1%), Meta Platforms (META 166.65, -2.62, -1.6%), and Apple (AAPL 152.95, -1.14, -0.7%) all contributed to the underperformance of their respective sectors, consumer discretionary (-0.9%), information technology (-0.6%), and communication services (-0.3%). These were the lone sectors to close in negative territory.

The best performing sector on the day, energy (+3.7%), was boosted by rising energy prices and the natural gas news from Europe. The Wall Street Journal reported that Gazprom is going to cut natural gas flows to Germany through the Nord Stream 1 pipeline to 20% capacity from 40% due to what it calls problems with a turbine.

The energy complex futures made noticeable upside moves today. WTI crude oil futures rose 2.2% to settle at $96.80/bbl. Natural gas futures rose 5.2% to $8.63/mmbtu. Unleaded gasoline futures rose 3.1% to $3.11/gal.

Treasury yields were on the rise today. The 2-yr note yield rose five basis points to 3.04% while the 10-yr note yield rose four basis points to 2.82%.

Ahead of tomorrow's open, earnings reports will be headlined by 3M (MMM), Albertsons (ACI), Coca-Cola (KO), Corning (GLW), General Electric (GE), General Motors (GM), Kimberly-Clark (KMB), McDonald's (MCD), Moody's (MCO), Polaris Industries (PII), PulteGroup (PHM), Raytheon Technologies (RTX), and UPS (UPS).

There was no U.S. economic data of note today.

Tuesday's agenda includes the following economic data:

  • 9:00 ET: May FHFA Housing Price Index (prior 1.6%) and May S&P Case-Shiller Home Price Index (consensus 20.8%; prior 21.2%)
  • 10:00 ET: July Consumer Confidence (consensus 96.4; prior 98.7) and June New Home Sales (consensus 670,000; prior 696,000)
  • Dow Jones Industrial Average: -11.9% YTD
  • S&P 400: -15.1% YTD
  • S&P 500: -16.8% YTD
  • Russell 2000: -19.0% YTD
  • Nasdaq Composite: -24.7% YTD

>>> TradeGate Pre-Market Indications

DAX:
  • Siemens Healthineers (SHL TH) -1.6%
  • HelloFresh (HFG TH) -2.1%
MDAX:
  • Grand City Properties (GYC TH) +0.6%
  • Delivery Hero (DHER TH) -1.1%
  • Bechtle (BC8 TH) -1.2%
  • Thyssenkrupp (TKA TH) -1.2%
  • Uniper (UN01 TH) -10%
    • Uniper Cut to Underweight at JPMorgan; PT 5.50 euros
    • Uniper Germany Has Halted Withdrawals From Storage: Regulator
SDAX:
  • Adler Group (ADJ TH) +2%
    • Adler Unit Seeks Shareholder Go-Ahead to Sell Bulk of Portfolio
  • Wacker Neuson (WAC TH) +1.3%
  • VERBIO Vereinigte (VBK TH) +1%
  • Hensoldt (HAG TH) -1%
  • Bilfinger (GBF TH) -1%
  • Hamborner REIT (HABA TH) -1.9%

Muss Tweed : Richemont and Farfetch edge towards YNAP all-share deal

Richemont and Farfetch edge towards YNAP all-share deal
By Astrid Wendlandt
24/07/22
Cartier owner Richemont and Farfetch are getting closer to a deal on the future of online fashion retailer YOOX-Net-A-Porter (YNAP), sources close to the two companies have said. A deal with Farfetch would involve giving Richemont a small minority stake in the luxury online platform in return for absorbing YNAP.
The emergence last week of activist fund Bluebell Capital Partners challenging Richemont’s governance could speed up talks, the sources said. Bluebell has been putting pressure on Richemont to sell some of its lossmaking businesses such as YNAP. On July 20, the fund attacked the authority and control of Johann Rupert, chairman of Richemont, requesting changes to the group’s by-laws. It also wants Richemont to elect Francesco Trapani, former LVMH executive and Bulgari CEO, to its board.
“I don’t see why Rupert would do this,” a senior source at Richemont said, adding that Rupert disliked being cornered and forced to do anything. Rupert is more focused on reaching a deal with Farfetch. “Discussions are going really well,” the senior source told Miss Tweed on condition of anonymity. “The probability (of reaching a deal) is very high,” he said. “At Farfetch, they are convinced and at Richemont there is great motivation.” Rupert’s son Anton is leading the talks with Farfetch together with Richemont CEO Jérôme Lambert.
The deal presents considerable execution risk, sources to the talks have said. It involves integrating several business models and companies. Many important strategic decisions need to be made first for it to work.
EQUITY DEAL
On the table is the following proposal: Farfetch would acquire loss-making YNAP and pay Richemont in shares. Farfetch believes Richemont should receive a stake in single digits, or a maximum of 10 percent, while Richemont argues it should be at least 12-13 percent.
The source close to Richemont said: “It is better to have 12-13 percent of something that works than 100 percent of something that does not work,” implying that it was better to have a minority stake in Farfetch than own YNAP, which was still losing more than €200 million a year.
For its part, Farfetch is keen to limit the dilution of the company’s equity. “The biggest stake Richemont could get is 10 percent,” a source close to Farfetch said. The reason for preferring equity over cash is that the former aligns the interests of Richemont and Farfetch and gives the two companies the same exposure to the potential upside that would be created by the turnaround of YNAP.
However, the volatility of Farfetch’s share price in the past year has placed another layer of complexity in the way of an agreement. Farfetch’s share price has collapsed in the past year because of slowing growth and macro-economic concerns that have affected other tech stocks and online retailers.
A year ago, Farfetch’s share price stood at $50 after reaching a high of more than $73 in February 2021. On Friday, the shares closed at $8.36, valuing the company at $3.19 billion. If Richemont accepted a stake of 10 percent in return for YNAP, it would value the online fashion retailer at $319 million today. “This would represent quite a bargain for a company of that size,” a London-based online retail industry executive said. Richemont does not publish YNAP’s revenue separately. It combines it with that of online watch retailer Watchfinder.
For the year to March 31, Richemont’s online distributors generated a combined loss of €210 million on revenue of €2.78 billion. However, most of the sales and losses come from YNAP, analysts estimate. Farfetch would more than double in size if it took on YNAP, enabling it better to compete against online giants Amazon and Alibaba. The two companies are several times bigger than Farfetch because their businesses cover countless product categories while the European player is focused mainly on fashion and luxury goods.
WRITE-DOWN
It might be some weeks, if not months, before a deal is announced but it could be before Christmas, sources close to the talks have said. “I would bet a lot on a deal happening,” the source close to Richemont said. “It will take time as it is very complex, but it could be announced before Christmas.” Richemont and Farfetch declined to comment.
Whatever deal Rupert agrees, Richemont will have to take a massive write-down on the carrying value of YNAP. “They are going to have to take a hit -- that is certain. So that they are no more losses in the future,” the source close to Richemont said.
Richemont, which bought control of YNAP in 2018, is estimated to have spent more than €4.5 billion since its first investment in the online retailer in 2003, when Net-A-Porter was still run by its founder Natalie Massenet. YOOX acquired Net-A-Porter in 2015 and in return gave Richemont a stake in the combined entity. Richemont’s ambition was to become a dominant force in digital luxury and give its watch, jewelry and fashion brands a state-of-the art “omni-channel” platform that would help them conquer the buoyant e-commerce luxury market.
Four years on, Richemont was forced to give up on YNAP’s ability to deliver on such promises and on its Next Era IT platform, which never met expectations. Miss Tweed was first to report on YNAP’s technological fiasco in the fall of 2020. Richemont’s priority now is to remove YNAP from its books.
Another point that needs to be discussed with Farfetch is the value of the business Richemont would bring Farfetch by allowing it to “re-platform” YNAP and the group’s brands. It would entail Farfetch providing the technology to run all of Richemont’s websites and power its brands’ e-commerce stores and YNAP.
Cartier has long been keen to work with Farfetch, as Miss Tweed reported in October when the Paris-based media was first to report tie-up talks were taking place between the two companies. Taking a commission on the sales of major jewelers such as Cartier and on Van Cleef & Arpels would represent significant recurring income for Farfetch. That future revenue, together with YNAP’s customer list and brand partnerships, needs to be put in the equation when negotiating the value of YNAP.
Another question is how Farfetch will manage the transition of Net-A-Porter’s business model from wholesale to concession. In the latter, NAP takes a commission on every sale whereas in the wholesale model, it buys stock and sells only part of it at full price. YOOX’s business model is mainly about selling past collections at a discount.
Another decision is who would lead YNAP’s turnaround. There has been an exodus of staff from YNAP in the past two to three years. Most of the executives behind the original successes of Net-A-Porter and its sister fashion e-commerce websites Mr Porter and The Outnet have long since left. YNAP has shed more than 40 percent of its staff in the past two to three years, sources close to YNAP and Richemont have said.
The company has been led by Richemont’s former technology chief Geoffroy Lefebvre since November 2020 following the departure of YOOX founder Federico Marchetti. Lefebvre is a capable hands-on manager but not a charismatic leader, staff at YNAP said. Working for Farfetch CEO José Neves, once closely associated with Massenet, founder of Net-A-Porter and former co-chairman of Farfetch, would inspire and motivate the troops at NAP. One of the reasons that Richemont was unable to make YNAP a success was that it lacked the necessary IT talents and management. Farfetch, on the other hand has a strong talent pool and could help solve that problem by appointing some its best managers to turn around YNAP.
MUCH ADO ABOUT NOTHING
Bluebell would be happy to see Richemont get rid of YNAP, which has been a headache for more than three years. However, people close to Richemont believe the fund has little leverage over Richemont. The fact that Richemont shares barely reacted to the announcement made by Bluebell on July 20th means that investors do not believe the London-based fund will get very far with its demands.
Rupert is unlikely to appoint Trapani to Richemont’s board as requested by Bluebell. About 10 to 15 years ago, the veteran luxury executive was his arch-rival when Bulgari was competing head on with Cartier, industry insiders say. Also, why would Rupert allow an activist fund to weaken his control over his group? As things stand, Rupert controls Richemont through his family holding Compagnie Financière Rupert which owns 10 percent of the group’s equity and 51 percent of voting rights through “B” shares. “B” shares differ from ordinary “A” shares in that they are entitled to one-tenth of dividend payments but have 10 times more voting rights than “A” shares.
Bluebell has asked for its requests to be added to the agenda of the group’s upcoming annual general meeting on Sept. 7. Richemont said the board was “considering the proposals and will communicate its recommendations on this subject in due course”.
Trapani resigned the chairmanship of Bluebell at the end of 2021 for health reasons. “I can confirm that Francesco Trapani has relinquished his role at Bluebell at the end of last year,” Marco Taricco, partner at Bluebell told Miss Tweed. “However, we have remained good friends and cooperate from time to time on individual situations. Like in this instance, where we believe he can add enormous value, because of the breadth of his experience.” Taricco said Bluebell wanted Richemont to focus on jewelry and watches, and exit from fashion and online retail, which he described as “distractions”. He underlined the fact that fashion was reported in Richemont's results as "other".
Taricco suggested Richemont should consider renaming itself Cartier Group, by far the largest contributor to the group’s bottom line, to signal its re-focus on hard jewelry. “We are asking to improve the governance and make it more balanced between “A” shareholders and holders of “B” shares. We also think that there could be some balance sheet optimization in light of the large net cash the company currently has.” At the end of March, Richemont had €5.2 billion net cash.
Rupert hates to be bullied, being a bit of a bully himself. The 72-year-old South African billionaire rules over Richemont and has been doing so for years. Bluebell is unlikely to succeed in twisting his arm no matter what publicity the media give its demands. Everybody knows Richemont is stronger in watches and jewelry than in fashion and the weakness of its fashion and online distribution businesses explains in part why Richemont is trading at a discount to industry peers such as LVMH.
Rupert is not ready to sell Chloé, Alaïa and leather goods brand Delvaux which it acquired last year for a total cash consideration of €178 million. The luxury magnate is also preparing the ground to pass the executive reins on to his son, Anton. Negotiating the complex deal with Farfetch is a baptism of fire for the 35-year-old. If he proves his mettle and succeeds, his legitimacy as Johann’s heir will be strengthened. Investors will accept Anton more readily than before as Richemont’s future boss. All the more reason for Richemont and Farfetch to find a compromise and strike a deal.