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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.