By Farfetch, the renowned U.K.-based operator of an online luxury-goods platform, might encounter legal obstacles as a bondholder group expresses discontent with the sales process and the lack of transparency surrounding the company’s financial state. This development comes after Farfetch announced on Wednesday that it had sold its business and assets to Coupang, a prominent South Korean online retailer, along with Greenoaks Capital Partners.
The terms of the deal were disclosed in mid-December. Under these terms, the bondholder group has agreed to furnish $500 million in bridge-loan financing to Farfetch, with the intention of converting the loan into equity via an English prepackaged bankruptcy proceeding. Unfortunately, as part of the arrangement, Farfetch’s equity and $1 billion of convertible debt will not receive any recovery value.
Following this news, FarFetch’s U.S.-listed stock plummeted to just 2 cents on Wednesday, while the public U.S. convertible debt of $400 million remained essentially stagnant at 2 cents on the dollar. Furthermore, an additional $600 million of convertible debt owned by Richemont, the esteemed European luxury-goods company, as well as Alibaba Group Holding, will also be rendered worthless.
Notably, the sales process leading up to the deal with Coupang deviates from the norm as Farfetch has not released any financial statements since the issuance of its second-quarter numbers in August. Consequently, bondholders and investors are unable to gauge whether the company’s sale to Coupang was indispensable in addressing what Farfetch refers to as a liquidity crisis that jeopardized its continuity.
In November, Farfetch decided against revealing its third-quarter financials, only to later announce the sale to Coupang in December. Interestingly, as of June 30, the company appeared to possess considerable liquidity with $450 million in cash, despite carrying approximately $1.6 billion in debt. At the time of the second-quarter release, Farfetch conveyed optimism, projecting a cash balance of approximately $800 million by the end of 2023.
Farfetch Bondholders Express Concerns over Expedited Sale to Coupang
An ad hoc group of Farfetch bondholders, who collectively own over 50% of the $400 million of the 3.75% convertible debt issue, has declared its intention to oppose the sale of Farfetch to Coupang.
The group highlights various issues with Farfetch’s handling of the sale process, including a lack of transparency and corporate governance. It criticizes the rapid speed of the sale and the terms of the bridge loan, which it claims have prevented other interested parties from making competitive offers and have not maximized asset value for stakeholders.
Furthermore, the bondholders raise concerns about Farfetch’s deteriorating financial position, Coupang’s offer being below market value, and the terms of the agreement that allegedly restrict bids from other potential buyers.
The bondholder group is currently considering all options for recovering value, including potential litigation.
Farfetch’s filing on Wednesday portrays the sales process as “robust” and mentions that its banker, J.P. Morgan, explored other potential buyers. Farfetch had originally indicated that the process would extend into April.
When approached for comment, a Farfetch spokesman declined to respond to the bondholder statement.
Possibly, the Farfetch bondholders may be open to reaching a deal with Coupang that involves additional payments from the South Korean company. Such a deal could result in some recovery of value for the $1 billion of convertible debt. It is speculated that a settlement offering 30 to 40 cents on the dollar could be acceptable to the bondholders.
However, for now, the bondholders face the possibility of receiving no compensation at all. Nevertheless, Coupang’s eagerness to swiftly acquire the Farfetch business might indicate a willingness on their part to offer a higher price.
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