LONDON, United Kingdom — The Richemont and Net-a-Porter saga began in 2002, when Natalie Massenet first took an investment from the luxury goods group on the encouragement of Carmen Busquets and her father, Jose, an industrialist who had made his own fortune in his native Venezuela with multiple businesses in the metallurgical sector, including copper and aluminium wire.

Busquets had become the original investor in the Net-a-Porter business in 1999. Building on her own experience of having run a fashion boutique in Venezuela, she took an active role in working with and advising Massenet, whom she saw as a visionary entrepreneur.

But in the aftermath of the dotcom bubble, which burst spectacularly in 2001, forcing many new technology companies to shutter, Busquets wondered how their investment in a start-up promising to sell luxury goods online would pan out. Many experts at the time thought it was a ludicrous idea.

Net-a-Porter was growing revenues, but was not yet earning profits. According to detailed financial statements seen by The Business of Fashion, Net-a-Porter lost just over £1 million in its first financial year, ending January 2001, on sales of £298 thousand. The next year, revenue increased by more than 300 percent to £1.3 million, and the year after that to £3 million. The company was still unprofitable, however — not uncommon in the world of technology start-ups, which are expected to lose money in their initial years as they refine their business models and acquire customers.

This approach requires ongoing investment to sustain a business through periods of negative cash flow. Busquets was advised that, in the case of Net-a-Porter, bringing in a strategic investor would help to shore up the fledgling business, especially as many of the angel investors who trumped up cash in the company's early days lacked the financial means to continue to invest in the business alongside Busquets as it grew. Out of consideration for Massenet and the management team, Busquets says she also preferred not to have too big an ownership stake in the business as it could create awkward power dynamics, so she was eager to bring a third party on board to balance things out.

Richemont emerged as a potential partner via Eloy Michotte, one of Net-a-Porter’s early angel investors who worked at the conglomerate and had a business relationship with Arnaud Massenet, Natalie’s then husband. In June 2002, Richemont participated in a £2 million investment round valuing the Net-a-Porter business at a post-money valuation of £10 million. As a condition of the investment, Richemont requested to have — and Busquets agreed to give — pre-emption rights, also known as the right of first refusal, to Richemont, allowing the company to match any offers to purchase the Net-a-Porter business should it attract acquisition interest.

According to a close friend and financial advisor of Busquets directly familiar with the Richemont and Net-a-Porter relationship, who spoke on the condition of anonymity, this was the fateful clause that would come back to haunt Massenet and Busquets years later: “When you have an 800-pound gorilla as your partner, a right of first refusal is actually a very bad thing because it means that they’ll always be able to outlast you, they’ll always be able to outspend you.”

Looking back now, Busquets says she had no choice but to go ahead on this basis. “No one else wanted to invest at the time. Remember, we are talking about 2002, when everyone was unsure about the future of the Internet after the dotcom bubble burst and after the economic crash of 9/11,” she says. “The condition for Richemont to invest was that they would get the same rights as us. I was very aware of what that meant, as they have more power than us.”

By all accounts, the relationship between Net-a-Porter and Richemont in the early years was healthy and constructive, with nothing more than the normal tensions that typically exist between investors and the companies they are backing. Two representatives of Richemont joined the Net-a-Porter board: Eloy Michotte, who shielded Net-a-Porter from Richemont interference, and Christopher Colfer, the affable chief executive of Dunhill, the London-based fashion brand owned by Richemont.

Meanwhile, Net-a-Porter’s revenues continued to grow, roughly doubling each year. The company raised two further rounds of funding to finance this growth — a £1.3 million round in October 2003 and a £4.5 million round in March 2004 — bringing the total money raised by the company since 1999 to just under £10 million. By January 2007, annual revenues had surged to more than £37 million, and Net-a-Porter was now profitable, earning a respectable £2 million before tax.

Towards the end of 2007, Net-a-Porter chief executive Mark Sebba began to push for the creation of a new employee stock option scheme — fairly standard in the tech start-up world — as the original scheme had lapsed. In order to do so, Net-a-Porter needed to get a valuation of the business.

According to one person close to Net-a-Porter, who spoke on condition of anonymity, Busquets was concerned that this valuation would come in very low and that Richemont would then buy the company at that price. But the valuation, prepared by JP Morgan Cazenove, came in at £210 million, surprising everyone with how high it was. Busquets decided to test the market and see if there was a buyer.

In 2008, Busquets and Net-a-Porter’s management team went to Eloy Michotte to share their plans to take the company to market and to ask what Richemont’s intentions were. Michotte encouraged management to seek out offers, while reserving Richemont’s pre-emption rights.

Net-a-Porter hired UBS to explore a sale of the business. Net-a-Porter attracted a low offer from LVMH, according to one person familiar with the sale process. Both Neiman Marcus and Nordstrom, the American department stores, also expressed an interest. But once the full scale of the 2008 global financial crisis came to light, later that year, these conversations led nowhere.

For Net-a-Porter, these recessionary years were when the business really came into its own. Over the next two years, while other retailers around the world suffered from plummeting sales, Net-a-Porter continued to grow — and, contrary to popular belief, did so profitably. By January 2009, annual revenues had grown to £81 million, with £10 million of pre-tax profit.

But Net-a-Porter employed a wholesale model, which relied on purchasing and holding inventory. Full price sell-through — a key measure of online sales productivity — hovered at around 65 percent. After the seasonal sale period was over, sell-through would end up between 80 to 85 percent, meaning there was still a stockpile of out-of-season inventory in the Net-a-Porter warehouses.

In the offline world, department stores and fashion brands use outlet stores to sell their aged inventory, enabling them to protect the upscale positioning of their core retail channels. But Net-a-Porter had no such dedicated, separate discount channel. For some time, Net-a-Porter had a permanent sale section on the site, but Massenet did not see this as a long-term solution.

“Natalie didn’t want to do a sale shop on Net-a-Porter itself, but she came up with this amazing name, The Outnet, and created this whole new image and everything that made that whole brand exciting,” recalls Busquets, who had set up her own discount shop back in her native Venezuela. “I said, 'Great, that’s where we can put all the leftover stock and everything.'” This also would enable Net-a-Porter to offer a new service to brand partners, one that would help them to liquidate their own inventory in an elegant way, leveraging Net-a-Porter’s branding, distribution and delivery expertise.

To run The Outnet, Massenet hired Stephanie Phair, a rising star at Portero, another e-commerce start-up. When The Outnet launched in 2009, the global economy was in the worst recession in a generation, following the near-collapse of the global financial system. Along with flash sales competitors like Gilt Groupe and Rue La La, The Outnet was able to capitalise on growing consumer interest in online fashion bargains.

In January 2010, despite the recession, Net-a-Porter received a letter of interest from Hearst, the publishing giant, which offered to acquire the business outright for £300 million, according to people familiar with the conversations. Two senior Hearst executives from New York — Scott Sassa and Frank Bennack Jr — travelled to London to meet with Natalie Massenet, Mark Sebba and Eloy Michotte.

The conversation did not go well. The close friend and advisor to Busquets says: “Richemont blocked it at every point, trying to buy the company, basically, on the cheap,” by trying to drive the price down. “When you have minorities that are trying to sell control and you have a right of first refusal and you’re doing things like that, I mean, there’s no other word to describe it other than completely unethical.”

Eventually, Richemont matched the Hearst offer at £300 million, but because of the way the articles were written into Net-a-Porter’s shareholders' documentation, there was no mechanism for Hearst to come back and counter-offer, and there was no way to run a bidding process, which could have led to a higher price. A 50/50 partnership between Hearst and Richemont was also mooted, but this idea did not go very far.

Richemont’s right of first refusal — a perfectly legal clause which many strategic investors insist upon — also had a chilling effect on other buyers. According to an individual familiar with the sale process, letters of interest from General Atlantic Partners and Summit Partners, both for around £400 million, were also on the table around this time, but were never fully developed. They were not motivated to do the necessary due diligence work to submit a firm offer, when it could just be trumped by a matching offer from Richemont.

One person familiar with the Net-a-Porter and Richemont relationship, who spoke on the condition of anonymity, describes the right of first refusal clause as “hugely problematic and probably a bit naïve on the part of the original shareholders to allow this to happen, and probably very unkind of Richemont to impose it, particularly knowing where the business was going at the time. But it did enable Richemont to reject anything on the way through.”

Another would-be suitor who spoke on the condition of anonymity corroborates this point of view: “A number of times, Richemont had just rebuffed anyone interested in talking about the company. It was pretty clear that what was good for the company, or good for the other shareholders wasn’t important to [Richemont]. They just cared [about] what was best for Richemont.”

Over the next few months, pressure continued to grow on Carmen Busquets to help Net-a-Porter find an exit. Busquets’ father Jose was ill and no longer had the energy or desire to sit on the Net-a-Porter board. The company’s management was increasingly desperate to cash out, as for many early employees, a sale would be a life-changing economic event, making them millionaires overnight. There was also further pressure to get a deal done by 1 April 2010, when a tax change in the UK would increase the taxes paid by employees on the proceeds from a sale.

With time running out, the focus eventually turned back to doing the deal with Richemont. Massenet flew to South Africa to meet with Johann Rupert, with whom she had a good relationship, to come to an understanding on how their companies could work together in this new long-term partnership. She also urged him to increase his offer and he agreed to a new price of £330 million.

As a result of the various investments in Net-a-Porter over the years, Massenet's share of the company had been diluted down to less than 20 percent, so she was keen to secure a generous package of incentives to stay at the business. On the advice of her lawyer, Massenet asked for incentives for herself and the management team. In addition to keeping a 4 percent stake in the company, Rupert agreed to give Massenet 10 percent of newly issued growth shares, as well as another 5 percent for the rest of the management team. These growth shares would enable Massenet and her team to benefit from the growth in value of the company after it had been acquired by Richemont and were key to retaining the management team.

According to Busquets, over the next few months, Richemont worked on a deal with the Net-a-Porter management team, without involving her. In doing so, Richemont also created a new company: Largenta, a London-based holding for the shares of Net-a-Porter owned by Massenet and Richemont together.

But at the end of the process, Busquets was still not happy with the Richemont offer on the table. In the space of one week, Busquets says she negotiated another deal with NEA and General Atlantic Partners to buy the company at a higher price, which provided further leverage for her to ask Richemont to up their offer. This led to last minute tensions between Richemont and Busquets, who says that the deal almost fell apart because the documents prepared by Richemont did not reflect all the terms they had agreed upon. Finally, in eleventh hour negotiations, Busquets and her father finally agreed to a deal for £350 million with Christopher Colfer, who had been brought in by Richemont to smooth over the discussions about a sale.

On 1 April 2010, Richemont announced it had taken a controlling 93 percent interest in the Net-a-Porter business for £350 million — just in time to meet the UK tax deadline. Busquets would keep a 2.3 percent stake in the company and secured anti-dilution provisions for herself and the management team, who were now locked in by their growth shares incentives and who, together, retained a 0.7 percent stake. The future value of their shares was backed by a structured independent arbitration process and a put-call agreement to determine the value of the company five years hence. If Richemont made an offer and management made a counter offer, then a third party would be hired to determine the fair value of the company.

With a deal in place, the Net-a-Porter management was once again able to focus on managing the business. A few months later, the company would launch Mr Porter, the company’s new menswear lifestyle e-commerce business.

Busquets — who as part of the deal gave up her seat on Net-a-Porter’s board — was now a persona non grata at Richemont. She and Massenet would meet in secret to catch up from time to time, but Busquets says she mostly stayed away.

Editor's Note: This article was updated on 31 January, 2016 to reflect that Jose Busquets had multiple businesses in the metallurgical sector, not only in copper and aluminium wire. He was also not a direct investor in Net-a-Porter, but invested indirectly through Carmen Busquets' personal trust, which he controlled.

How did Federico Marchetti manage to strike the ‘deal of a lifetime’ with Richemont to get the YNAP merger done at such favourable terms? To read Part 2, click here.

Research for this article was contributed by Kate Abnett.

Disclosure: Via Cabus Ventures, Carmen Busquets is part of a group of investors who, together, hold a minority interest in The Business of Fashion. All investors have signed shareholder’s documentation guaranteeing BoF’s complete editorial independence.