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Richemont in Talks to Sell YNAP Stake to Farfetch

Compagnie Financière Richemont S.A. has detailed long-awaited plans for its money-losing Yoox-Net-A-Porter (YNAP) business, and now it’s in advanced talks to sell a minority stake to London-based Farfetch Ltd.

The Swiss luxury conglomerate said on Friday that it is in “advanced discussions with Farfetch with a view to enhancing the partnership it established last year.” Richemont’s ultimate goal is for YNAP to become a neutral platform with no controlling shareholders.

Richemont, British-Portuguese online luxury e-tailer Farfetch and Chinese technology firm Alibaba Group Holding Ltd. last November joined forces in a $1.15 billion strategic partnership, with the aim of giving luxury brands access to China’s consumers, while at the same time accelerating the sector’s digitalization. The partnership’s plan was for Farfetch to set up its own channels on Alibaba’s Tmall Luxury Pavilion and Luxury Soho, and for Alibaba and Richemont to each invest $300 million in notes issued by Farfetch.

The two would also front a $250 million investment in Farfetch China, a new joint venture where they would hold a combined 25 percent stake. At the same time, Paris-based Groupe Artemis, the luxury holding company that includes Kering, elected to invest $50 million to increase its stake in Farfetch.

Many have wondered what Richemont might do with its YNAP investment. Richemont acquired its majority stake in Net-A-Porter in 2010, and in 2015 merged it with Italian online e-tail Yoox to create a platform with combined sales of $1.4 billion. It subsequently acquired the 50 percent balance in YNAP that it didn’t already own from the 2015 merger. But while Richemont understood well the more traditional “hard” luxury brands in its portfolio—Cartier, Van Cleef & Arpels, Vacheron Constantin, Baume & Mercier Piaget, Chloé, Montblanc and Peter Millar,among others—it isn’t as well schooled in the technological needs or strategies required for an online business.

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Richemont faced whispers that it was planning to sell a stake in YNAP to Farfetch. The speculation made sense, not only in terms of how the partnership could be extended, but also because the Farfetch Marketplace connects customers in over 190 countries, with products from more than 50 countries and nearly 1,400 of the world’s top brands, in a single luxury platform. Founded in 2007 by José Neves, the Farfetch model offers its broad range of consumer-facing channels and platform solutions to the luxury industry through its existingLuxury New Retail (LNR) initiative with Richemont. Farfetch’s other businesses include Browns and Stadium Goods, and New Guards Group, a platform for the development of global fashion brands.

On Friday, the Swiss luxury firm also said it’s made “further progress” in its goal to create a “neutral, industry-wide platform, built on the latest omnichannel retail technologies, to support the digitasation of the luxury industry.” Richemont said “other industry players and investors” have already indicated their interest in investing in the YNAP platform.

While Richemont cautioned that there can be no certainty that an agreement with Farfetch will be reached, or how long it would take, the Swiss firm said it “continues to work with Farfetch towards definitive agreements.”

Farfetch confirmed talks with Richemont in relation to a “potential expansion” of their existing LNR partnership. “The parties are discussing a number of possible options, including the leveraging of Farfetch Platform Solutions (FPS) to power Richemont’s maisons and Yoox Net-A-Porter, the participation of Richemont’s maisons in Farfetch’s Marketplace and a minority investment in YNAP by Farfetch,” it said.

Wells Fargo retail and softlines analyst Ike Boruchow on Friday said the deal would make for a “truly transformative transaction,” while also solidifying Farfetch’s leading position in the digital luxury space via a stake in YNAP. “This would essentially team up Farfetch with its largest competitor” and add greater negotiating leverage with brands, he said. For Farfetch, the deal would also give it access to Richemont’s hard luxury brands and provide greater credibility for the FPS business.

For Richemont, developing a minority venture would mean that YNAP’s losses could be eliminated from its profit and loss (P/L) statement. “Having spent more than 4.5 billion euros  ($5.15 billion) on YNAP since 2010, the business has failed to live up to Richemont’s ambitions of developing a global luxury digital platform, in part owing to an inconsistent strategy,” the analyst said, noting a possible valuation for YNAP at $4.0 billion. YNAP last year generated 2.0 billion-plus euros ($2.29 billion) in revenues, but Boruchow noted that it also lost $200 million in EBITDA (earnings before interest, taxes, depreciation and amortization).

Boruchow speculated that if Farfetch were to pay $1.0 billion for a 25 percent stake, he’d expect all Richemont brands—revenues were 800 million euros ($913.6 million at average exchange) last year—would move onto the FPS platform. Moreover, he also speculated that the London-based firm could transition about one-third of YNAP’s e-commerce revenue, or 700 million euros ($801.3 million) to the FPS platform. With another estimated $150 million of Richemont’s brands sold on the marketplace, Boruchow estimated that there could be the potential for Farfetch to add to its P/L statement $2.2 billion in incremental GMV (gross merchandise value), $375 million in revenues, and $250 million in EBITDA.