A group of investors are pushing back against the proposed sale of Farfetch
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Called the 2027 Ad Hoc Group, they represent over 50% of institutional investors holding 3.75% convertible senior notes in Farfetch due in 2027.
The Group’s first shot across the bow – declaring Farfetch in default and demanding immediate repayment in full for the value of the notes – comes in response to Farfetch’s notice on Wednesday, January 24, that current investors in the notes “should not expect to recover their outstanding investments.”
The Group represents investors with more than $1 trillion under management, though the Group did not disclose the amount of money it seeks to recover in its statement.
The Group has appointed London and New York-based Pallas Partners as legal counsel and investment bank Ducera Partners as financial advisers to “urgently evaluate options.”
The Group’s window of opportunity to thwart the proposed Coupang acquisition is between now and April 30, when the deal closes.
“The proposed sale to Coupang is wiping millions of dollars of debt to zero and also harming employees and other investors,” Fiona Huntriss, partner at Pallas Partners, shared in a statement with me.
“Our clients are highly concerned about the reasons why this distress sale has come about, whether the business was even marketed to others and why the terms of the proposed sale to Coupang are so value-destructive,” she said and added, “Our clients have accelerated their bonds as a first step towards protecting their investments in Farfetch.”
Neither Farfetch or Coupang responded to a request for comment.
The Allegations
Based upon terms of Farfetch’s transaction support agreement (TSA) with Coupang, investment advisor Greenoaks Capital and others, a so-called poison pill was inserted into the TSA that requires any competing bidder to pay a $1 billion fee on top of any agreed upon amount.
Effectively, Coupang is set to acquire Farfetch at a bargain-basement price. Any other acquirer would need to add another $1 billion to their bid, “making it unviable for any other bidders to present an alternative, value-maximizing offer,” the Group stated.
In addition, the Group demands more transparency into how the process unfolded, especially because, as of August 2023 in its second quarter earnings call, Farfetch was guiding investors that it would deliver cash and cash equivalents of over $800 million by the end of the year.
The Group wants to know how Farfetch went from liquidity to a “distressed sale” four months later. As of August last year, the Group claims JP Morgan estimated the enterprise value of Farfetch to be in excess of $3 billion.
“The Group is seriously concerned by the rapid and unexplained deterioration in the financial position of Farfetch between August and December 2023,” it stated. “There appears to have been no transparency or governance in this process.”
The Options
The Group asserts that there are at least three credible partners interested in acquiring all or parts of the Farfetch business. For example, WWD reported in mid-December that tech-investor Carmen Busquets was looking to raise between $500 million and $1 billion to “rescue” Farfetch.
“Fundamentally, I believe in the fashion and technology marketplace sector and I believe Farfetch remains the leading company in the industry. It has driven fundamental change to the distribution of fashion globally over the last 15 years,” she told WWD.
While questions remain about prospects for online luxury marketplaces, Farfetch founder and CEO José Neves failed to discover a marketplace business model that works, unlike competitor Mytheresa, which has been profitable for the last two fiscal years.
Rather, Neves seems to have let his ambitions run away with him by acquiring companies, making deals and investments. Most recently, he got distracted trying to acquire a majority interest in e-commerce marketplace YNAP from Richemont with nothing to show for it. That deal broke down pending the Coupang acquisition.
But other company assets retain value and can be spun off, including luxury boutique Browns, sneaker brand Stadium Goods, luxury brand platform New Guards Group, which includes the Off White brand, Opening Ceremony and newly added Reebok license. It also is holding a $200 million investment in Neiman Marcus Group.
Coming Next
The Group is moving aggressively to protect their investors and explore other options for Farfetch before the door closes at the end of April.
“The arguments presented by the Ad Hoc Group are fair, unlike the behavior at Farfetch, which seems more and more like fraud, or at least incompetency, in the executive suites and board rooms,” suggests Vijay Marolia, chief investment officer at Regal Point Capital Management, whose firm never took a position on Farfetch.
Regarding the Coupang deal with Farfetch, Neil Saunders, Globaldata’s managing director and retail analyst, shared with Vogue Business, “They believe that Farfetch rushed into this in desperation and has not sufficiently investigated alternatives. The Ad Hoc Group is now essentially doing that work for Farfetch.”
Noting that organizing an investor group to take actions such as these is not common, Saunders suggests the Group faces an uphill battle.
“As much as Ad Hoc Group may have a point about the Coupang deal undervaluing the company, to change course they are going to have to produce a compelling alternative that works financially. If they don’t, then the status quo will likely prevail. That said, this really increases pressure on Farfetch’s management team and, to a certain extent on Coupang, to justify their arrangement,” he said.
However, after speaking to representatives of the Group on background and studying their written statements, I’m convinced they will take all necessary steps to protect their investors’ interests. They have right on their side.
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