Miss Tweed : Bondholders seek to block Farfetch sale to Coupang
Online fashion retailer Farfetch faces a new battle. A group of bondholders, including the U.S. activist hedge fund Fir Tree Partners, is seeking to block its sale to Korea’s Coupang by demanding immediate repayment of the $400 million they loaned the London-based company.
The investors are backed by fellow creditors Richemont and Chinese online giant Alibaba. Together, they are trying to force Farfetch to sell as many assets as possible to raise funds and get some of their money back before the sale to Coupang is completed.
Alibaba and Richemont each hold $300 million in 2030 convertible notes, which they could turn into shares in mid 2026. Earlier this month, Richemont said it had written off the value of its Farfetch notes. Together with Alibaba, it is now happy to make the bet that the group of investors will succeed in squeezing some cash out of Farfetch so that it can recover some of its lost funds.
“Richemont and Alibaba are supportive and agree with the steps that have been taken,” a person involved in the investors’ proceedings against Farfetch told Miss Tweed.
Analysts estimate that Richemont has lost more than €4.5 billion on its various e-commerce ventures in the past 15 years, including Yoox-Net-A-Porter (YNAP) and its failed partnership with Farfetch. That’s the amount of operating profit its jewelry brands Cartier, Van Cleef & Arpels and Buccellati generated in its last fiscal year to March 2023.
As far as Farfetch is concerned, it will be remembered as the company that burned more than $5 billion of investors’ money in 16 years. When Farfetch delisted on Dec. 30, the company’s backers – which included major Silicon Valley venture capital firms and Artemis, the Pinault family’s investment company – lost their entire investment, or several tens or hundreds of millions of dollars. Disappointed by what happened and by Farfetch CEO José Neves, many senior directors have jumped ship in the past few weeks, turning Farfetch into a zombie company. Its more than 6,000 staff, the majority of whom are based in Portugal, do not know if they will still have a job in six months.
Farfetch’s financial meltdown has had ripple effects. It spooked Apax Partners, the controlling shareholder of British online fashion retailer MatchesFashion. After the private equity firm found out what happened with Farfetch, it called it a day and was no longer willing to put in a further £40-50 million to keep the company afloat. It launched an accelerated sale process and within weeks, on Dec. 20, MatchesFashion was sold to Frasers Group for £52 million, a fraction of the more than £750 million Apax paid for it in 2017.
The next deal will be Richemont’s sale of YNAP. The Swiss group said it had received approaches from potential buyers and planned to offload the business within a year. YNAP’s more than 4,000 staff are also wondering what their fate will be.
The recent wave of consolidation is making the industry think hard about the online fashion retail business model and its future. Truth is, no one has figured out how to make money selling fashion wholesale online. Even Mytheresa, which is good at selling brands’ stories and curating looks, is struggling in the current downturn.
Brands prefer to invest in their own e-commerce websites and bricks-and-mortar boutiques than to build partnerships with third-party online distributors, whom they need much less now than during the pandemic when shops were closed. In the past two years, brands have imposed harsher payment and business terms on online distributors and have withheld stock of their bestsellers, keeping those for their own boutiques and websites. Add to this an environment in which consumers are reluctant to splurge on fashion and luxury due to inflation and higher interest rates, and how are online fashion wholesalers supposed to make money? The question is particularly relevant given how expensive it is to run an e-commerce fashion business due to the technology investments required and the high costs incurred from storing, shipping and returns.
NOTICE OF DEFAULT
Activist investor Fir Tree together with more than ten other investment companies, managing more than $1 trillion of assets and representing more than 50 percent of Farfetch’s 2027 convertible notes, formed a coalition called the 2027 Ad Hoc Group.
On Thursday, the group issued a notice of default against Farfetch, demanding immediate repayment of their $400 million notes. The default was triggered by the delisting of Farfetch from the New York Stock Exchange on Dec. 30. Due to regulatory requirements, the group had to wait until this week to file the notice to the London company.
At the end of April, when the exclusivity period with Coupang ends, Farfetch is planning to file for bankruptcy, which will last only a few hours. That way it can wipe out and reduce to zero all of its debts and Coupang can come in and save the company by injecting $500 million in cash. The process is called a pre-pack administration. It’s precisely what the bondholders are trying to prevent. If it happens, they will never get any money back.
BATTLE WITH CREDITORS
As the battle with creditors started in earnest this week, several people close to the matter said they would be “very surprised” if the U.S. stock market watchdog, the Securities and Exchange Commission, had not launched a preliminary investigation into Farfetch. Investors want to know if they were misled about the company’s growth and profitability prospects. The SEC cannot comment publicly on ongoing investigations.
The Farfetch bondholders also question the company’s honesty and transparency. In a statement issued on Friday, they said they had “serious concerns about how Farfetch went from guiding the market to year-end 2023 liquidity of over US$800 million in August 2023 to a distressed sale four months later.”
“At the time of the announcement of the agreement” [on Dec. 18], the statement said, “analyst consensus (including its house broker JPMorgan) estimated Farfetch’s enterprise value to be in excess of $3 billion. As such, the Group is seriously concerned by the rapid and unexplained deterioration in the financial position of Farfetch between August and December 2023.”
When the deal with Richemont fell apart in November, Neves understood that the company was not going to get the revenue it expected from working with the group’s brands and replatforming of YNAP, in which it was to take a 47.5 percent stake. That’s when it started actively looking for a white knight.
“The deal with Coupang was done in a week and a half,” one person with first-hand knowledge of the matter said.
A spokesperson for the 2027 Ad Hoc Group was quoted in the statement issued Friday as saying: “The Group believes this process sets an incredibly dangerous precedent. Allowing this transaction to complete fails to maximize the value of the assets of the Company, at a time when at least three other credible parties were publicly reported to be interested in all or parts of the business. The Group is urgently considering appropriate next steps.”
The bondholders said that if Farfetch failed to honor its debt, they would challenge the sale to Coupang through various mechanisms, including litigation. They have denounced the deal’s poison pill of $1 billion. That’s the fee that will have to be paid to the lending firm Greenoaks if a company submits a rival offer in compensation for terminating the agreement between Farfetch, Coupang and Greenoaks. Greenoaks is a major investor in Coupang but also in companies such as Stripe and Deliveroo. It is financing Coupang’s purchase of Farfetch and providing the $500 million liquidity. Coupang, a fast-delivery company and marketplace, is also lossmaking and leveraged to the hilt.
“The Group believes that better value for the assets of Farfetch could be achieved through alternative routes than the proposed sale, including a break-up sale of the assets to interested bidders, several of whom have been publicly identified,” the bondholders said in the statement. “There appears to have been no transparency or governance in this process, which has reportedly left many of Farfetch’s luxury retail partners uncomfortable and considering severing ties.” Miss Tweed was first to report that some luxury groups, such as Kering, were considering exiting Farfetch, a fact that the French group never publicly denied.
SELLING ASSETS
In the past three years, Farfetch has spent more than $1.2 billion on acquisitions. The bondholders think Farfetch could raise considerable amounts by selling some of its most liquid assets, such as its stake in Neiman Marcus, estimated to be worth several hundreds of millions of dollars. Also on the market is Farfetch’s fashion company New Guards Group (NGG), the distributors and manufacturers of streetwear brands Off-White, Palm Angels, Heron Preston and Alanui. On their own websites as well as on the Farfetch marketplace, the brands are now selling many of their products at a 65 percent discount. The pressure is on to turn stock into cash.
Italian fund Style Capital has reportedly been interested in making a bid for NGG, but no concrete deal has been put on the table yet. It’s not clear what will be left of NGG by the time it’s sold. Several key managers have left, sources close to the company say. That includes the commercial team, the executive in charge of digital and the legal team. The communications director of Off-White also resigned recently, the sources say. NGG’s revenues in 2022 are estimated to have exceeded $650 million.
Last year, designers Nicolò and Carlotta Oddi, the founders of Italian knitwear brand Alanui, demanded that NGG buy their 49 percent stake as part of their shareholders’ agreement. NGG owns 51 percent of Alanui, a young brand generating around €30-€40 million in annual sales and a few millions in underlying profit. “It’s not clear where Farfetch will find the money to buy them out,” a senior source close to NGG said.
The list of people angry at Farfetch and Neves keeps getting longer every month. Who would have thought the adventure would end that way when the 34-year-old Portuguese entrepreneur launched Farfetch in 2008, helping brick-and-mortar distributors to sell their stock online? The Russians have a great proverb: “If you want to make God laugh, tell him your plans.”