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Richemont is doubling down on digital. On Monday, nearly three years after it spun off Net-a-Porter and merged it with Italian rival Yoox to form the Yoox Net-a-Porter Group (YNAP), the Swiss luxury conglomerate made a surprise tender offer to buy the 51 percent of shares in the luxury e-commerce giant that it doesn't already own. (The 2015 merger gave Richemont 48.9 percent of YNAP, but only a 25 percent voting stake, leaving Yoox's management in charge.)
Richemont has offered to pay €38 per share, a 26 percent premium over the group's closing price on the Borsa Italiana last Friday, at an EBITDA multiple of 26x. The bid still needs approval from YNAP shareholders, but chief executive Federico Marchetti has indicated he will support the deal. Should it be approved, the total investment for Richemont would be about €2.7 billion, valuing the YNAP business at about €5 billion — no small sum.
While many analysts see the transaction as a positive outcome for YNAP shareholders, others have questioned whether the premium is high enough for the dominant player in the fast growing luxury e-commerce market. Recent high-profile deals in the same space have been at much higher valuation multiples. In September, private equity firm Apax Partners acquired a majority stake in MatchesFashion.com in a deal that valued the company at a reported $1 billion, putting the company's EBITDA multiple at about 42x, high for a business with a traditional wholesale model. Last year, Farfetch closed an investment from JD.com, valuing the fashion platform at more than $3 billion, according to market reports.
But perhaps the more interesting question is why Richemont is pursuing this deal, and why now?
First, Richemont has amassed a large pile of cash sitting unproductively on its balance sheet and the move will be accretive to the company's growth. (Richemont has been seeking new avenues for expansion as the company's core watches and jewellery business has struggled amid a hard luxury downturn and its fashion assets have continued to underperform.)
There's also no doubt that YNAP is a highly valuable asset. Full control of the company would give Richemont a strong position in luxury e-commerce. "With this new step, we intend to strengthen Richemont's presence and focus on the digital channel, which is becoming critically important in meeting luxury consumers' needs," said Johann Rupert, chairman of Richemont. The company has long been seen as a digital laggard and the markets have been looking for signs that the group is taking action to reposition itself.
But there are questions on the long-term merits of the move. Richemont plans to continue operating YNAP as a separate business. Will this make it difficult to capture meaningful synergies between YNAP and the conglomerate's other divisions? That remains to be seen. For all the years that Richemont owned Net-a-Porter, the synergies were few and far between.
Then there's the question of YNAP's future relationship with Richemont's arch-rivals, Kering and LVMH. YNAP powers e-commerce sites for 40 luxury brands, including several Kering brands, as well as Armani and Valentino. Will they continue to work with a platform that's fully controlled by Richemont, exposing increasingly important data on the performance of their brands to the competition? As digital becomes a bigger strategic priority, Kering may well pull its brands from the platform and opt for greater control, while LVMH may choose to focus its e-commerce strategy on its own multi-brand play: 24 Sèvres.
And finally there's the debate on valuation. The bid is the latest twist in a long history between YNAP and Richemont going back more than fifteen years. Richemont was an early investor in Net-a-Porter, taking a minority stake in the business in 2002, before acquiring the majority of Net-a-Porter from a group of private shareholders eight years later. When Richemont sold its stake in Net-a-Porter to Yoox for 15x EBITDA in 2015, it led to a drawn-out dispute between Richemont and Net-a-Porter's management team and investors over the company's valuation. Now, three years later, Richemont is buying the entirety of the business for 26x EBITDA. Could the valuation really have gone up so much in such a short period?
The company is significantly bigger than Farfetch or MatchesFashion, but YNAP's growth has been flattening while the competition is accelerating. In 2017, YNAP surpassed €2 billion euros (about $2.6 billion) in net revenues, up nearly 17 percent year-over-year, according to preliminary results released last week. Not bad, but at the lower end of the company's goal to increase revenue annually by 17 to 20 percent in the years to 2020, and well below the growth rates of close competitors. (In 2016, revenue at MatchesFashion surged 61 percent to just over £204 million, while EBITDA hit £19 million, nearly six times more than the previous year. Farfetch's gross merchandise value grew to £548 million (about $718 million) for the year ending December 31, 2016, up 81 percent year-on-year, while sales hit £151 million in 2016, up 74 percent from 2015.)
So, will Richemont's high-stakes YNAP gamble pay off? Will the world's largest fashion e-commerce giant maintain its dominance or suffer from increased competition as its first-mover advantage erodes? And is the value of the deal too high or too low?
On the long-term success of the company, only time will tell. But on valuation, we may have an answer sooner rather than later. "We think there is a possibility of a counter-bid to Richemont's offer. We view YNAP as a high-quality, fast-growing asset with sustainable competitive advantages," wrote Sherri Malek, an analyst at the Royal Bank of Canada, in a report released this week, adding: "We would also not rule out the possibility of Amazon seeking to purchase an asset within the fashion industry, in order to build its credibility with brands and consumers, which we view as currently lacking."
YNAP is officially in play and this long running fashion e-commerce saga may yet contain a few more chapters.
THE NEWS IN BRIEF
BUSINESS AND THE ECONOMY
LVMH posts record revenues amid China comeback. The world's biggest luxury-goods maker posted an 18 percent rise in operating income for 2017, as it benefitted from a steady recovery in Asian demand. The French company said sales rose 11 percent between October and December on a like-for-like basis, which strips out currency swings. LVMH shares climbed 3.1 percent at 247.50 euros on the back of its upbeat outlook and solid results. Chairman Bernard Arnault was especially bullish about the year to come, following the news of Hedi Slimane's return to the group.
Hedi Slimane takes the helm at Céline. Starting February 1, the designer will take on the title of artistic, creative and image director and expand the LVMH-owned label’s offering into menswear, couture and fragrance. He will show his first collection for the brand in September during Paris Fashion Week. Slimane takes over at Céline from Phoebe Philo, who announced she would be leaving the house after its Autumn 2018 presentation in March. Reactions have been mixed so far. Arnault hopes Slimane will help Céline, whose sales are close to 1 billion euros, to double or triple its revenues within five years.
Fashion gets a spot on the Davos agenda. At the annual World Economic Forum in Switzerland, which began on Wednesday, fashion topics were given a larger presence on the main stage. Stella McCartney joined Ellen MacArthur to unveil initiatives designed to boost a circular economy, which focuses on minimising energy use and waste, while activist and academic Sinéad Burke's compelling talk on adaptive fashion at VOICES 2017 in December, led her to give four talks at Davos on fashion design, inclusion and disability.
Tod's to see benefits from new management in second half. The Italian luxury group said preliminary sales for 2017 were 963.3 million euros, in line with analyst forecasts of 965 billion euros. Revenue was down 4.1 percent year-on-year at reported rates. The company said the results of its new management team would be visible starting in the second part of the year, though admitting 2018 will be a "year of transition."
Mary Katrantzou raises investment to boost business in China. Chinese heiress-turned-investor Wendy Yu has acquired a minority stake in London-based womenswear label. The investment was made in October 2017 via Yu Capital, a division of Hong Kong-based Yu Holdings. The move is part of Yu’s wider plan to act as bridge for Western brands targeting China's consumers. The terms of the transaction were undisclosed.
Asos sales rise 23 percent. The UK’s largest online-only fashion retailer experienced a rebound in domestic growth over the holiday season. Sales in the UK, Asos' largest market, rose 23 percent to £300.9 million ($429 million) in the four months ending December 31. The results demonstrate that the UK market is “far from saturated,” said a Berenberg analyst.
Kering, Stella McCartney in talks to end partnership. The French luxury group is in discussions to sell its 50 percent share of Stella McCartney back to the namesake designer, according to a source familiar with the discussions. The announcement, originally slated for early January, has been pushed back indefinitely. In 2015, market sources estimated that Stella McCartney’s annual global sales were somewhere between $150 million and $200 million.
Miroslava Duma and Ulyana Sergeenko accused of racism, homophobia and transphobia. The Russian designer came under fire for sending a bouquet of flowers to Duma with a handwritten note that included a racial slur, which the street style star-turned-entrepreneur posted to her Instagram Stories. Later, a disturbing video of Duma from 2012 surfaced, in which she makes homophobic and transphobic comments about the blogger Bryanboy and transgender model Andreja Pejić. Both Sergeenko and Duma have issued apologies.
Abercrombie chairman to retire. Arthur Martinez, 78, has been chairman since 2014, the year when long-time chief executive Mike Jeffries departed and the once-hip clothing brand set out to regain its cachet with shoppers. The company boosted its fourth-quarter forecast, sending shares up as much as 8.8 percent in early trading.
Amy Odell exits Hearst. The editor of Hearst-owned Cosmopolitan.com is leaving after a four-and-a-half year stint. Odell said on Twitter that she plans to pursue other projects, one of which is writing a second book. Jessica Pels, MarieClaire.com's digital director since 2014, will take over her position.
Amazon's automated store of the future opens. The retailer opened its checkout-free grocery store to the public after more than a year of testing. The Seattle store, known as Amazon Go, relies on cameras and sensors to track what shoppers remove from the shelves, and what they put back. Cash registers and checkout lines become superfluous, as customers are billed after leaving the store using credit cards on file. Touch-and-go” spending is expected to increase by more than 300 percent over the next four years, according to Barclays.
Snapchat will let users share stories outside its mobile app. In a bid to spur growth, the company will let publishers of some story content share the material on other websites. The change could help expose a broader set of people to the kinds of videos that appear on Snapchat, potentially increasing downloads or teaching others what works on the app. The company has reported several quarters of disappointing user growth.
JD.com prepares to enter US and France. China’s largest retailer has announced the opening of its Paris office, as well as the appointment of Florent Courau as managing director for JD.com in France. The launch is an important milestone for JD.com, as the e-commerce platform seeks to develop its luxury brand portfolio and is ramping up its European presence. The company is also preparing to make its US debut, challenging Amazon on its home turf.
Depop secures $20 million for US expansion. The social shopping platform has raised a $20 million Series B round led by Octopus Ventures, a British venture capital firm, and will use the new funding to open brick-and-mortar stores in New York and LA.
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