European Union antitrust regulators are poised to make a crucial ruling by Friday regarding the proposed acquisition by online luxury retailer Farfetch of a stake in its rival YNAP, owned by Cartier’s parent company, Richemont. However, this deal is encountering complications due to the mounting challenges facing Farfetch.
Farfetch, a U.S.-listed company known for pioneering an innovative online luxury retail model, has struggled to reach profitability. High technology and marketing costs have contributed to this challenge. Additionally, the company is grappling with reduced orders from U.S. retailers and an increasing reliance on brand-provided inventory, limiting its ability to attract customers through promotions.
Over the past two years, Farfetch’s shares have seen a dramatic decline of over 90%, causing its market capitalization to plummet from $26 billion to just over $1 billion. In August, the company faced a 40% drop in share value following a gloomy annual sales outlook, primarily due to weaker demand in key U.S. and Chinese markets.
Richemont’s announcement to sell a 47.5% stake in YNAP in exchange for more than 50 million Farfetch shares was made in August 2022, leading to a significant 2.7 billion euro ($2.9 billion) writedown for the Swiss conglomerate.
As part of this deal, Farfetch has the option to acquire the remaining shares in YNAP through a put and call option scheme.
The EU’s competition authority has the discretion to approve the deal with or without specific conditions or initiate a four-month investigation if substantial concerns arise.
Analysts at Bernstein have highlighted that Farfetch’s ongoing difficulties raise questions for Richemont, which, under the agreement, plans to transition its online business to a technology managed by Farfetch and provide a $450 million credit facility. This move will further integrate Richemont with the online retailer.
Bernstein stated, «There are various elements to this deal, and Farfetch could potentially overcome its challenges by narrowing its focus. Nevertheless, it will continue to impact Richemont’s share price until they address investor concerns about the extent of their commitment to support their new partner.»
The challenges faced by Farfetch could potentially have a ripple effect on an industry already facing difficulties. Over 500 Italian boutiques rely on the platform, and renowned department stores like Harrods and Bergdorf Goodman depend on its technology.
